Banks and companies borrowing in the overseas bond markets are likely to be able to do so at a lower cost after Moody’s upgraded India’s sovereign rating to Baa2 on Friday. The secondary markets reflected the change on Friday with the spreads for both quasi-sovereign paper — ONGC, NHAI, NTPC, a host of banks — and also some private sector players tightening by anywhere between 5 and 10 basis points. Arun Saigal, MD, head of financing, Barclays India, confirmed to FE credit spreads had tightened. “The sovereign upgrade reinforces the positive trend in India credit. We should see an improvement both from a pricing standpoint as well as increased investor appetite for longer dated issuances from the country,” Saigal said.
Jayesh Mehta, MD and country treasurer, Bank of America, pointed out that Indian bonds had already been trading at a notch above the country rating. “Given that potentially more investors will now be eligible to invest in Indian paper, the spreads could go down further,” Mehta said, adding an immediate contraction had already been seen. Borrowers from India have so far mopped up $12.3 billion by way of foreign currency bonds; this compares with a total of around $11 billion in 2016. Moody’s on Friday upgraded its local and foreign currency issuer ratings for India to Baa2 from Baa3, with a stable outlook, from positive. Bond and currency expert Ananth Narayan said credit spreads for Indian bonds should tighten. “As a follow through, real investor appetite for India and Indian issuers risk should improve, given Moody’s now rates us two notches above junk,” Narayan said.
He added that historically rating agencies have been more conservative than markets in valuing India, as a result of which the credit spreads have typically been tighter than those of peers. Indian borrowers have been seeing a steady drop in borrowing costs. In August, Axis Bank priced its five-year dollar bonds at 130 basis points over the five-year US Treasury yield. That was a fall of 30 basis points in the spread over a year — in June last year it has issued a five-year dollar bond at a spread of 160 basis points over US Treasury. One reason why Indian paper remains attractive is because the supply is limited. The $12.35 billion raised this year is small compared with the supply from China. With liquidity abundant and appetite for Indian paper unsatiated, even companies that are rated well below top grade are mopping up money overseas. Foreign currency high-yield bond issuances from India have crossed $6 billion in 2017 so far to hit $6.3 billion.
That’s a threefold increase over the amount raised in 2016. Typically, bonds rated below BBB- are called high-yield bonds. For instance, Vedanta Resources rated B+ by Standard & Poor’s issued dollar bonds in August, picking up $1 billion. To be sure, borrowers from countries like China have mopped up larger sums of over $21 billion, according to Moody’s. As Chetan Joshi, head (debt capital markets), HSBC India, pointed out recently, a relatively smaller supply of Indian paper compared to other Asian countries also drives the fundamentally positive credit view of investors on Indian companies.