Reform hopes spur demand for Indian corporate bonds overseas
MUMBAI: Indian corporate bonds are finding a ready market overseas with demand fuelled by expectations that the Narendra Modi government has a strong enough mandate to push ahead with economic reforms that will lead to a revival in growth. Companies had to sweeten offerings with high interest rates to woo offshore investors last year. The spread or gap with benchmark US Treasury yields -the benchmarks for pricing such securities -has contracted, reflecting robust demand.
“On the back of economic and political tailwinds, foreign currency bonds issued by Indian companies are now priced about 100 to 125 basis points (bps) lower than a year ago,” said Rahul Banerjee, managing director and regional head, South Asia capital markets, Standard Chartered Bank. A basis point is one-hundredth of a percentage point.
For example, India’s largest private sector lender ICICI Bank had sold five-and-a-half year bonds to raise $750 million at 4.80%, a rate determined by adding 355 bps over and above the five-year US Treasu ry bond in November 2013.
A few weeks ago, the same lender mopped up $500 million and $200 million in two tranches, but the re spective spreads had narrowed to 176 bps and 166 bps over the five year US Treasury yield.
In the secondary market too, bond yields have shrunk signifi cantly since the respective is suances. The 10-year, BBBrated ONGC bonds issued in July are yielding about 4.21%, 48 bps low er since their de but, show Bloom berg data. Bond yields and prices move in opposite directions.
Axis Bank raised $500 million by selling offshore bonds at 3.25% last month, but these are trading at 10-15 bps lower now, showing buying interest.
“All eyes are cur rently on the Bud get (scheduled to be announced in , February) and any roadmap to reduce the deficit and give an impe tus to the economy would lead further significant participation in India credits by foreign investors,” said Manmohan Singh, head, debt capital markets, India and South east Asia, Royal Bank of Scotland.
According to RBS, companies are likely to raise around $20 billion by selling offshore bonds next year compared with a record $18 billion so far in this calendar year. In 2013, Indian companies had raised $15 billion compared with $10 billion a year earlier.
“India is positioned very favourably within the emerging markets basket and thus continues to attract inflows,” said Sanjeev Jha, director and head of capital markets, Bank of America Merrill Lynch. “The offshore bond markets provide a much larger size and longer tenors.”
“This, combined with constructive global market conditions and liquidity chasing quality names, makes a strong case for Indian companies to diversify their fund ing needs to offshore bond markets,” he said.
Tata Steel, Reliance Jio, JSW, ONGC Videsh and Oil India are some of the major issuers. Despite falling domestic rates, India Inc still is expected to look at the overseas market due to size and tenor.
Certain regulatory relaxations are also seen as leading to a boom in next year’s issuances.
In November, RBI eased norms for parking external commercial borrowings or ECBs, allowing companies to keep them as fixed deposits for six months for use at a later stage. Earlier, funds raised from abroad meant for rupee expenditure in India had to be immediately credited to the rupee accounts of such borrowers.
“We understand RBI’s balanced approach towards ECB norms…will lead to many corporate issuers gain advantage via accessing international bond markets,” Singh said.
Similarly, withholding tax on foreign bond funds has been slashed to 5% from 20% earlier. “The withholding tax change allowed a lot of flexibility for Indian issuers like JSW and Tata Motors,” said Banerjee. “The trend is likely to continue next year even higher volumes on the back of an uptick in the capital investment cycle.”
Japan, the world’s third-largest economy , and the European Central Bank are both pumping in liquidity to lift their economies, adding to the global availability of cash.
