The market was very dislocated last year with US bond yields on an upward march till November, and trade issues were flaring up.
Foreign currency bond issuances out of India have already crossed the $15-billion mark this year. Chetan Joshi, head-debt capital markets at HSBC India, tells Bhavik Nair that Indian FCY bond issuances may even reach the $20-billion mark by the end of 2019. Excerpts:
How much have Indian companies and banks issued in the foreign currency bond market so far in 2019? Where does it stand compared to last year?
This year, we are already north of $15 billion in foreign currency bond issuances out of India while the entire last year saw roughly only around $6 billion worth of issuances. The market was very dislocated last year with US bond yields on an upward march till November, and trade issues were flaring up. This narrative has changed quite dramatically from January this year when the Fed first signalled a shift away from the upward trajectory in rates, which had a major impact on sentiment. The problem that bond investors faced in 2018 in regard to a structurally rising bond yields hurting their portfolio has now completely reversed. Moreover, with regard to trade wars, the markets have now taken into account the fact that this may lead to episodic disruption.
How much bond issuances do you expect from Indian entities in 2019? Will that be anywhere near a record high?
We are looking at an amount potentially north of $20 billion of foreign currency bond issuances out of India this year. If reached, the level will also be a record high. I think the figure is achievable considering we have already crossed $15-bn.
Which sectors have prominently tapped the foreign currency bond market this year and which are the ones likely to hit the market in the coming months?
One dominant sector this year in the FCY bond market is infrastructure, in its various forms, including renewables, airports, ports and public sector energy issuers. Due to its capital intensive need, I see infra as continuing to remain dominant, going forward. NBFC is another sector that has taken baby steps into the market. We all expect this to become a more prominent sector. Also, now that the RBI window of 7-year and 10-year rupee refinancing has opened up, I think you may see some manufacturing sector issuers also tapping the dollar bond market.
By how much have the trade wars impacted the dollar bond market? Indian issuers seem to be waiting on the sidelines for the market to be get better. How long will it take?
I don’t think any issuer has said they won’t tap the market because of the trade wars. All that has happened is that some issuers have said they want to be more careful in timing. I think, in the last few months, you are seeing markets remaining fundamentally more volatile and headline driven, and dollar bond markets in particular have been in a start and stop mode. Most issuers, therefore, need to be in a high level of preparedness and as and when markets open up, swiftly move to tap them rather than be caught sitting out because of lack of preparedness.
How have the spreads on dollar bonds from India been panning out?
Spreads are definitely tighter compared to the beginning of the year. Are they the tightest? Obviously, they are not because you are having intermittent volatility due to trade and other geopolitical concerns. On the face of it, low yields look attractive for issuers. However, recently, yields have been low not because of a lower trajectory of rates but because the markets are fundamentally risk-off. This is a problem because you might have a lower overall yield but wider spreads. That is a bit of a challenge for most Indian issuers because they are largely floating rate issuers. If your credit spreads are higher, the optically lower yield of the bond doesn’t help either in lowering the spread over Libor, or in terms of post swap rupee yields, where applicable.
Are there any bottlenecks on the regulatory side that you wish could have been reviewed?
One thing that could be examined is whether the cap of 450 bps over an applicable benchmark is really the best mechanism by which you are regulating issuances. This 450 bps over say Libor type framework can be deterrent for some issuers who may be of decent quality but from a sector which requires somewhat higher risk premium.