Global ?risk on?, liquidity helping firms cut debt cost
Bharti Airtel?s successful $1 billion issue of bonds is more evidence of strong investor appetite for Indian paper. In the past two months, half a dozen Indian banks and corporates have, between them, successfully mopped up close to $4 billion across tenures, whether it was Tata Communications?s three-year offering or Reliance Industries Ltd?s issue of perpetual bonds. Indeed, despite apprehension about a possible country ratings downgrade, all the issues, without exception, have attracted overwhelming responses?both HDFC Bank and Bharti saw subscriptions to the tune of ten times the amount finally placed out.
To be sure, the successful placements are part of the current global trend in which the debt markets are seeing a lot of action and fund managers are beginning to use their limits for the current year. Also, it must be remembered that global bond investors have very little India exposure?Indian bonds account for less than 1% of the global market. To that extent, there is some scarcity value and the subscription pattern reflects that fund managers across continents are buying into Indian bonds; in Bharti?s case for instance, the book was even divided between the US, Asia and Europe. The exceptionally fine pricing that both banks and corporates have been able to get?HDFC Bank has been able to raise five-year money at a coupon of just 3%?is the result of global ?risk on? and the abundant liquidity that?s driving down rates. Spreads have contracted by at least 125-150 basis points from what they were in July last year when State Bank of India hit the market and today even companies that don?t command a top notch rating are able to mop up money at reasonably good rates. What?s more, a glance at the prices in the secondary market indicates investors aren?t having second thoughts about their purchases.
This, therefore, seems to be a good time for those corporates that might be overly indebted in the loan market, to switch some of their debt to the bond market, cashing in on the voracious appetite for such paper and locking into low rates for a long tenure. After all, one can?t count on the market staying liquid forever. Borrowing overseas clearly makes sense for those companies that intend to use the funds offshore, but even those firms that want to bring the money onshore may find it works out cheaper than a rupee loan, the cost of hedging the exposure notwithstanding. Of course, if the repayments of these bonds are bunched up, it would lead to large dollar outflows, pressuring the exchange rate.