Bond sales drop to lowest in a year

Written by Bloomberg | Updated: Sep 28 2011, 06:16am hrs
International bond sales by Indian companies have slumped to the lowest in more than a year as their borrowing costs surge to levels not seen since the collapse of the Lehman Brothers.

Indian Oil Corporation and NTPC led borrowers in selling $1.2 billion this quarter, the least since offerings totaled $250 million in the three months ended June 2010. The average yield on dollar-denominated notes climbed 130 basis points to 6.57%, the most since the final quarter of 2008, according to debt indexes compiled by HSBC Holdings Plc. Comparable rates rose 69 basis points for Chinese companies and fell 84 basis points for US firms.

Sales have slid after a record first half, threatening to starve funding for companies amid the highest rupee borrowing costs in three years. State-run Allahabad Bank, IDBI Bank, Indian Bank and UCO Bank delayed foreign-currency issuance in the third quarter as Europes debt crisis spurred investors to reduce their holdings of riskier emerging-market bonds. Bond sales are going through, but its a question of whether issuers are prepared to pay the premiums or not, Viktor Hjort, a Hong Kong-based credit strategist with Morgan Stanley, said. I find a lot of issuers are not and, hence, are choosing not to tap the market.

Dollar bonds issued in the first six months of the year more than tripled from a year earlier to $7.8 billion, fueled by Indian companies global takeovers that totaled $18.5 billion, according to data compiled by Bloomberg. The slowing of sales this quarter has coincided with an increase in the cost of protecting debt of Indian companies against non-payment.

The average rate on credit-default swaps of eight issuers has climbed 170 basis points, or 1.7 percentage point, since the end of June to 417 basis points, according to CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a nation or company fail to adhere to its debt agreements.

Rupee funding costs for companies are also rising. The average for borrowers rated AAA by Crisil has climbed 53 basis points this year to 9.47%, according to data compiled by Bloomberg. The difference in yields between top-rated five-year corporate debt and similar-maturity government bonds has widened 19 basis points from this years low reached in July to 99 basis points.

Costs have increased as the Reserve Bank of India (RBI) raised the benchmark repurchase rate by 225 basis points over the past year to curb the fastest inflation of the biggest emerging markets. Indian price pressures have been fairly stubborn though they should subside by March next year, governor Duvvuri Subbarao said in New York. The average rate companies pay to borrow in dollars over US treasuries widened 205 basis points this quarter to 591, the biggest advance since December 2008, indexes compiled by HSBC show. Similar spreads for China widened 157 basis points to 533 and by an average of 126 to 422 for Asia.

Higher borrowing costs will make it more expensive to refinance debt. About $2.8 billion of non-rupee loans and bonds fall due in the final quarter, compared with $2.4 billion in the year-earlier period.

The cost of refinancing is rising, Philippe Petit, a senior investment manager at Pictet Asset Management SA that oversees $19 billion in emerging-market debt, said in an interview. Companies that issue overseas debt will have to pay the price. The increase in funding costs isnt likely to pose any material refinancing risks for companies in Asias third- biggest economy, according to S&P.

For most Indian companies, our assessment is that liquidity is either adequate or strong, Mehul P Sukkawala, a Mumbai-based credit analyst at the ratings company, said. Our expectation is that either their internal cash flows or current liquidity should be adequate to meet their near-term maturities.