The expectation of three rate hikes was already factored-in by the financial markets, and underlying UST rates have been moving in line with this outcome.
Foreign currency bond issuances from India have scaled to $16.4 billion so far this year, not far from the record highs seen in 2014. Neville Fernandes, head of debt capital markets at Citi India, tells Bhavik Nair in an interview that the trend will continue in 2018, as issuers actively look to diversify their investor base. He observed, though, that rising interest rates globally could see fund flows slowly moving back to developed markets. Excerpts:
The Fed has hiked the rate and three more rate hikes are expected next year. How much effect would this have on the borrowing cost for foreign currency bond issuers?
The expectation of three rate hikes was already factored-in by the financial markets, and underlying UST rates have been moving in line with this outcome. While the interest rate environment is important, two other factors—global liquidity and investor interest in Indian dollar bonds—will determine the direction of underlying yields for Indian issuers. As it stands today, there is significant global liquidity and strong interest from investors in Indian dollar bonds. There is also an acute scarcity of supply from India. As a consequence, the yields are very low in comparison to the last 12-24 months. If these dynamics around liquidity and scarcity change, there will be an impact on the underlying yields. Rising interest rates globally could contribute to fund flows slowly moving back to developed markets, from emerging markets, given better risk-reward dynamics. At the same time, if you have a lot more Indian issuers raising dollar bonds in 2018 than what we have seen this year, investors will have more options to choose from. We are probably seeing the bottom of yields for Indian issuers. Will that change in a hurry? I don’t think so. Is there a secular trend where it starts to move up? That’s a given fact.
How would you review the foreign currency bond issuances from India in 2017?
I believe 2017 has been a very good year for foreign currency bond issuances from India. As much as $16.4 billion worth of G3 currency bonds were issued this year, which is significantly higher than the issuance volumes in the last two years when volumes were in the range of $7.5-8 billion each. This year we reached close to the record high volumes seen in 2014 at $17.5 billion. Many first-time issuers tapped the international bond markets this year and there was considerable diversification across sectors—airports, IT services, metals & mining, oil & gas, banks, NBFCs, renewables, autos, ports infrastructure and real estate. This is a sign of health, as it indicates that investors are willing to take exposure to storied credits, in a wide range of industries, across the ratings spectrum. I would also say that the upgrade of India’s sovereign rating by Moody’s was a good shot in the arm and helps accelerate the positive momentum as we get in to 2018.
Have credit costs come down for Indian bond issuers?
We have seen a compression in dollar bond credit spreads in 2017, across Indian banks and corporates. For example, spreads at the beginning of the year, on investment grade five-year dollar bonds issued by Indian banks used to be around 150 basis points over five year US Treasuries. Today, these spreads are in the range of 100 to 125 bps, pointing to a 25-50 basis points compression. The tightening in credit spreads for sub-investment grade dollar bonds issued by Indian corporates has been higher with spreads tightening by approximately 50-75 basis points during the year.
What has led to this compression of spreads?
There are two key factors that have contributed to the reduction in credit spreads. Firstly from a global perspective, abundant liquidity, significant scarcity of Indian dollar bonds and diversification needs of global investors have contributed to strong demand. Secondly, India also enjoys political and economic stability and the country’s monetary and fiscal policies have been steady and consistent. These factors have played a significant role in attracting dollar bond fund flows which have ultimately led to compression in underlying credit spreads. Five billion dollars worth of bank bonds are coming up for refinancing next year. What is your view on this? Yes, there are $5.35 billion worth of Indian bank G3 bonds, across 9 issuers, which are to be refinanced/redeemed in 2018. I expect the sophisticated bankers to bring issues of size in 2018 and maintain a liquid benchmark. The issuer may either refinance ahead of time or, depending on market conditions and their outlook on credit growth, redeem the bonds through asset run-offs and then come back to the bonds market later. Those banks who do not want to approach the dollar bond market, might consider refinancing from another source like the dollar syndicated loan market, which continues to be very liquid and attractive as well.
What is your view for 2018?
I am optimistic about 2018. I expect volumes to remain strong and the diversity of issuers to be further enhanced with new issuers accessing the market for a variety of end uses. Issuers are also actively looking to diversify their investor base, given existing RBI regulations on Specified Borrowers and Large Exposures. We are working closely with several issuers who are actively targeting an issuance in 2018.