At least three non-banking finance companies (NBFCs)—Indiabulls Housing Finance, Dewan Housing Finance and Shriram Transport Finance—are likely to hit the masala bond market early in the new year, sources confirmed to FE.
The NBFCs are likely to raise about $200 million each through masala bonds with a tenor of 5 years, a source told FE. Masala bonds are rupee-denominated bonds issued in the overseas market. Unlike with dollar bonds, in masala bonds the currency risk is borne by the investor and not the issuer.
Indiabulls Housing Finance had issued its first masala bonds in September 2016 at a coupon rate of 8.57%. The paper had a tenor of three years and one month. Shriram Transport Finance first entered the Masala bonds market in January 2017 and priced its issue at a finer coupon rate of 8.25% for a similar tenor paper. For Dewan Housing Finance, though, this will be a maiden masala bond issue.
The country’s largest mortgage lender Housing Development Finance Corporation (HDFC) and rural-focused Mahindra Finance are also believed to be keen on tapping the masala bond market, sources indicated.
Emails sent to the prospective issuers requesting confirmation of the story remained unanswered till the time of going to press.
Despite the rising yield on government securities (g-sec), market experts believe that due to the restrictions on investments by foreign portfolio investors’ (FPI) in Indian debt securities, the bonds should draw significant interest.
Ananth Narayan, a money market expert points out that at current yields, there would be good demand for rupee-denominated paper from FPIs, given the investment limit constraints. “In such a scenario, masala bonds will see good interest from overseas investors. The pricing could go lower than the yield on their domestic debentures,” Narayan said.
This is because general category FPIs have already utilised 99% of the permitted investment limit in central government securities and corporate bonds. The only remaining way to gain exposure to rupee-denominated debt securities would be Masala bonds.
Moreover, the recent strengthening of the rupee might give a boost to Masala bond issuances. The currency is expected to further strengthen in the coming year, after approximately $2.6 billion of investment limits in corporate bonds are opened up for FPIs in January.
Although a limited supply of Indian corporate debt paper and a stable currency make the Masala bonds attractive, regulatory norms ensure that this fund raising option is not freely accessible to all. Unlike earlier, issuers now need the central bank’s approval to issue Masala bonds. The all-in-cost ceiling for such instruments has also been set at 300 basis points over the prevailing yield of central government securities of corresponding maturity. As a result, lower rated firms that do not command a tight pricing won’t be able to tap this route.
Since the first Masala bonds were issued in July 2016, Indian firms have raised more than $3 billion through these instruments.