Sovereign bond issue may fetch up to $8 billion, but fraught with risks

Written by Aparna Iyer | Mumbai | Updated: Jul 16 2013, 06:30am hrs
The government may be in a position to raise between $5 billion and $8 billion from the global markets if it decides to go ahead with a sovereign bond issue, say bankers.

"I would believe that a $5-billion size is achievable depending on the pricing. Ultimately, the interest is dependent on what kind of coupon one offers. Both the Resurgent India bonds (RIB) and India Millenuim Deposits (IMD) were attractively priced. Any fresh issuance would also need to be attractively priced to garner strong interest from the investors," said Brijen Puri, head of trading at JPMorgan.

While an overseas sovereign bond issue is being considered as among the better solutions to turn the tide for the rupee, the fix could be a risky one. Market participants said that the single biggest risk in the sovereign bond issue this time around is its possible failure to garner a strong response due to global uncertainties around unwinding of the US Federal Reserve's quantitative easing programme and the weak outlook for the Indian economy and its currency. "There seems to be considerable trepidation about doing a sovereign bond issue, there is a risk of it sending all the wrong signals, said Abheek Barua, HDFC Bank chief economist.

Indonesia, the most recent to complete a sovereign bond issue, raised $1 billion at a yield of 5.45% the highest since 2010. The higher yield was attributed to the recent rise in US Treasury yields which are used as benchmark for most bond issues.

The key to a successful issue may lie in pricing the bond attractively to compensate for its BBB- sovereign rating. Further, the government will have to bear the exchange rate risk on these bonds for them to be successful, bankers said.

The closest benchmark for the pricing of a sovereign bond issue by the government of India may be bonds issued by State Bank of India, which are considered as quasi-sovereign by investors. SBI's five-year bonds are currently trading at an yield of 3.80% currently. Bankers said a sovereign bond could command a lower coupon rate than the yield on SBI bonds although the timing of the issue could weigh on the pricing, bankers said.

Market participants have also suggested that the government announce a programme of bond issuances to raise funds through tranches rather than announce a single issue, which may not bring in the desired amount of dollars. "A cumulative issue in the range of $20-25 billion done in several tranches would help stabilise the rupee. The first two tranches could have a green shoe option," said Abheek Barua. India had issued sovereign bonds to overseas investors on two occasions, one in 1991 to tide over the balance of payments crisis and in 1998 following the Asian crisis.

While the government and the RBI have shied away from sovereign issues in the recent past, the option is now being actively debated as the rupee continues to trade under pressure and forex reserves have fallen to a three-year low. On Friday, the government met with foreign banks to get views on the issue.

"Issue of sovereign bonds is an option. We have to sit down and work out the details, hence, I cannot comment on the finer details at the moment, said Rangarajan, chairman, Prime Minister's Economic Advisory Council.

With inputs from Gireesh Chandra