With liquidity abundant and appetite for Indian paper unsatiated, even companies that are rated well below top grade are mopping up money overseas.
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 three-fold increase over the amount raised in 2016. Typically, bonds rated below “BBB-” are called high-yield bonds. For instance, Vedanta Resources rated “B+” by S&P 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. But as Chetan Joshi, head (debt capital markets), HSBC India, points out that Indian companies too are able access the markets thanks to the favourable macro view that investors have of India. “That there is relatively a smaller supply of Indian paper compared to other Asian countries also drives the fundamentally positive credit view of investors on Indian companies,” Joshi observed. Indeed, investors have been willing to bet on companies that don’t command a top rating despite the fact that yields have been coming off. Neville Fernandes, head (debt capital markets), Citi India, points out bond yields in most developed economies continue to remain near historic lows. “As a consequence, global investors are chasing higher yielding emerging-market debt, including that from India,” Fernandes said. Yields which ranged between 6.125% and 12% in 2015, slipped to 4.5-9.05% in 2016. In 2017, the range has compressed even further to 4.25-7.13%.
Several companies have tapped markets overseas given it is easier to borrow for longer tenures and the terms can be easier. Sidharath Kapur, president, GMR Airports, said at times the covenants in the local market can be onerous. “One covenant that investors asked for was that the bond be redeemed if the rating fell by a notch,“ Kapur said. Citi’s Fernandes confirmed that one reason Indian companies have attempted to access global markets is to have more flexible covenants. “They are also looking to diversify their investor base, extend debt maturities and deepen their capital structure,” Fernandes pointed out.
Shashikant Rathi, EVP and head (treasury), Axis Bank, points out there are country-specific reasons and rating parameters/ceilings because of which some very good Indian companies also tend to have BB/BB+ international rating. “Investors now understand this and are willing to invest in well run Indian companies rated less than BBB- internationally,” Rathi adds.
Moody’s Investors Service says that the Asian high-yield bond market has shown a record level of issuance for January-September 2017; the rating agency added refinancing risk is manageable and the default rate for the whole year will remain low. “A total of $9.1 billion was issued in Q3, raising issuance through end-September to $30.7 billion, a record high-level for the first nine months of the year,” the agency said.