Dollar bonds of SBI that were trading at a spread of 390 bps over corresponding benchmark in mid-April were recently trading at a spread of 260 bps.
Spreads on foreign currency bonds (FCY) out of India are gradually coming back to the pre-Covid 19 crisis levels while foreign investor interest continues to remain strong in Indian papers despite the sovereign downgrade by Moody’s. According to information provided by bankers, spreads on papers have come down by at least 100 bps in recent times compared to April when there was significant widening in spreads. For example, dollar bonds of SBI that were trading at a spread of 390 bps over corresponding benchmark in mid-April were recently trading at a spread of 260 bps. Similarly, bonds of IRFC that were trading at a spread of 350 bps earlier have been trading at a spread of around 245 bps in recent times.
Aditya Bagree, head, Asia Local Currency Credit Trading at Citi India, said that in line with the global rally in risk assets on the back of liquidity infusions by central banks, spreads for Indian FCY bonds have tightened over the last few weeks at an extreme pace. “While investment grade bond spreads widened 350-500 bps between February and March, they tightened 250-300 bps between April and now. The swing has been even more for high-yield bonds,” Bagree said.
Bagree further noted that foreign investors are comfortable lending funds to Indian companies at the right pricing. “Investment grade bonds and some high quality high yield issuers will be able to tap the dollar bond markets — the primary markets are normalising fast and are now open for business,” Bagree said.
Despite the sovereign rating downgrade by Moody’s, foreign investor appetite for Indian FCY bonds remains strong. Bankers say that the response seen by bonds of REC and UPL indicates that foreign investors are still looking out for Indian papers. Indian issuers have so far raised about $8.5 billion from the overseas bond market between January and May 2020. Last year, Indian issuers picked up over $11 billion in the same period, according to data provided by Barclays Bank India. The pace of fund raising was strong in the first three months of 2020 when Indian firms raised a record $8 billion from the overseas bond market. However, the Covid-19 crisis applied brakes to fund-raising activity with last two months witnessing almost negligible activity.
Arun Saigal, managing director and head of DCM at Barclays Bank, India said that post Covid-19, investor appetite took a nosedive which was further impacted by the widening in borrowing costs for issuers in offshore markets.
“Investor appetite has returned for the Indian high grade issuers. We expect Indian high grade issuers to tap the market opportunistically in near future. However, the investor appetite is expected to remain constrained for Indian high yield issuers given the RBI’s external commercial borrowing (ECB) pricing caps and lack of investor appetite at levels within the pricing caps,” Saigal said.