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Monday, 11 December 2017

An empty space

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The Indian economy’s stunning growth over the part decade has been cause and effect of the growth of bond issuance from the country, both domestically and offshore. While the long-term outlook for issuance growth is positive, the primary market has stumbled thanks to the US sub-prime mess, most notably in the previously buoyant G3 space.

India’s bond issuance in G3 currencies has been non-existent this year having broken all-time highs last year, building on steadily increasing volumes over the past four years. The reason for the failure to issue this year has been extreme risk aversion towards Asian credit among global investors, with only quasi-sovereign or investment-grade deals, principally from South Korea or Hong Kong, getting away.

And while India is investment grade and its larger banks rated at the sovereign ceiling, it would be true to say that of those Indian issuers that might have got deals away, none was willing to pay the risk premium required to place paper in the public offshore G3 market.

A key casualty of this dynamic has been ICICI Bank, which last year blazed a trail for the country in offshore markets, bringing a staggering US$6.7bn of deals in the public bond and syndicated loan markets at the parent and subsidiary levels. The bank last January formally put its offshore borrowing plans on hold, taking the view that pricing had become too expensive and that it would sit it out until market conditions improved.

This decision scuppered plans to raise around US$3bn in early 2008 via a syndicated loan, a Samurai bond in Japan, a chunky private placement in the US Reg D market and a global Reg S/144a bond.

Sudhir Dole, head of the international financial institutions group and transaction banking at the bank’s Mumbai headquarters stated confidently at the beginning of this year that the bank was looking to equal the amount it raised in 2007, but not at the rates which prevailed in January.

“It does not make sense to be borrowing at the current levels, especially given the regulatory cap on the interest rate payable on external commercial borrowings by Indian companies,” he said. Credit spreads did not improve in ICICI’s favour as the year progressed.

And despite this the Indian regulators had anyway created a challenging scenario for companies eyeing offshore borrowing by capping in May 2007 the allowable rate for three-year and five-year tenors at Libor plus 150bp and 250bp respectively.

To take ICICI, for example, with its cost of five-year default protection hanging around the 350bp for most of this year, having been at around half this level during the bank’s 2007 borrowing binge, the possibility of bringing an offshore deal had been stymied. With investors demanding a hefty negative basis in the new risk-averse credit environment, particularly for a name like ICICI with a hefty wedge of offshore debt outstanding, issuance would have had to come at least at around the Libor plus 475bp mark to get over the line.

Although the RBI moved these ceilings higher last May to 200bp and 350bp respectively, it was not enough to allow the country’s banks or prime corporate names to access the public markets, explaining the lack of offshore issuance this year.

Meanwhile, the domestic market has chugged along nicely, with annual issuance picking up from just US$4bn-equivalent in 2003, to build to an average of around US$11bn-equivalent over the past three years and registering US$11.6bn-equivalent so far this year with four months left for the 2007 total of US$14.7bn-equivalent to be exceeded.

Indeed the closure of the G3 markets this year and the consequent turning, out of necessity, of the country’s borrowers back to local markets is no bad thing. A significant example is the opening up this year of India’s domestic FIG bank capital market, which has seen a rush of perpetual issuance from the likes of Punjab National Bank, UCO Bank, Vijaya Bank and the eponymous ICICI.

The reality is that emerging countries such as India should encourage domestic market issuance, given the precedent of the Asian financial crisis and the dangers of currency mismatch presented by offshore markets.

Although India’s capital account is not fully open, meaning this risk is to some extent ameliorated, the country urgently needs to develop its onshore bond markets, given its huge investment need over the next decade, with offshore markets unlikely to be able to absorb the US$5trn-equivalent the country is estimated to need to spend on its creaking infrastructure over that period.

Jonathan Rogers

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