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Tuesday, 24 October 2017

Blight of being tight

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Fee levels in the G3 bond markets have touched new lows amidst intense competition among banks to win mandates from price-sensitive Indian borrowers. This compression seems set to continue with more Indian issuers expected to tap the G3 markets going forward.

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Indian borrowers have long had a reputation for being a price-sensitive lot. This was borne out in Indian Oil Corp’s US$500m 10-year bond in late July. BNP Paribas, Citigroup and RBS were the three banks that handled the deal and one of them bid just US$1 in fees for the privilege of doing so. There is little doubt that it was simply a league table, trophy trade.

In fact, this was not the first time IOC’s offshore bond was completed on such low fees. Back in January 2010, IOC’s debut offering was the harbinger of fee compression on Indian G3 bonds when the borrower mandated Deutsche Bank, HSBC and Standard Chartered for the deal at an extraordinarily low fee of just 3bp – or just 0.01% per bank.

Thankfully for DCM bankers, IOC’s most recent transaction printed in late July when market conditions had already started deteriorating, making new issuance challenging.

Since IOC’s bond hit the market, there has been only one G3 currency offering from India and that too from a borrower – Ballarpur Industries (Bilt), which was in no position to demand that its banks work for low fees, let alone for free.

Given the patchy nature of deal flow from India in the past, it begs the question whether or not banks are shooting themselves in the foot in choosing to do deals for practically zero fees. Of the issuance of around US$63bn year to date from Asia (ex-Japan, ex-Australasia), India has accounted for US$8.22bn in terms of volume.

In comparison, Chinese credits have raised double the amount with nearly US$17bn transacted in the same period. What is more, PRC high-yield borrowers accounted for US$9.73bn – more than all Indian borrowers (high grade and high yield) combined – with the country’s property sector raising US$4.53bn. Furthermore, Chinese borrowers happily pay up fees to get their deals away.

“Imagine what would have happened if Chinese borrowers had taken the same approach as their Indian counterparts. The G3 bond business wouldn’t have been as rewarding as it has been so far this year,” said one Hong Kong-based DCM banker.

“The state-owned borrowers from India are particularly notorious for paying little or no fees as they go for the lowest bidder,” said another Singapore-based head of DCM syndicate. “However, they are also, for the time being, the biggest providers of opportunities.”

Indeed, of the 16 transactions from India this year, only three have had anything to do with private-sector borrowers. All three were high-yield credits, which means DCM bankers had a decent payday on their transactions.

However, only one of the three – Vedanta Resources – raised, what would be considered, a chunky fundraising. Vedanta completed a US$1.65bn two-part issuance in late May. With the exception of ICICI Bank, which printed a US$1bn bond a week before Vedanta, no other Indian borrower has raised more than US$500m.

That is not to say that India, as a market, is not attractive for the DCM business. A slew of borrowers have queued up to issue offshore bonds and these include some first-time issuers, such as telecom bellwether Bharti Airtel and Essar Group outsourcing unit Aegis. The two companies completed roadshows in June, but they have been cooling their heels since because market conditions have not been conducive enough to finish the job at hand.

If their deals materialise, they will add more variety to the profile of Indian borrowers and pave the way for other like-rated credits to make offshore forays. In past years, banks and financial institutions have dominated issuance from India. The more corporates venture overseas with their bond offerings, the greater the opportunity.

One of the more remarkable achievements in G3 currency issuance this year has been the emergence of long-dated bonds.

Bilt became the first Indian company to print a foreign currency perpetual bond in August, but not after Tata Power had set the stage with a US$450m 60-year hybrid in mid-April – also the first foreign currency corporate hybrid from the country. More interestingly, the two deals priced amid tough market conditions – something Indian borrowers would not have been brave enough to do in the past.

Global selloff

Tata Power’s offering printed on April 19 and came after S&P had rattled global markets with its warning of a downgrade in its top credit rating for the US a day earlier and even as more established Asian borrowers, such as South Korean lender Hana Bank and Hong Kong blue-chip Wharf Holdings, pulled their deals at the last minute.

Bilt’s US$200m transaction was Asia’s first high-yield borrowing in over two months when it priced in early August amid a global selloff that had hammered riskier assets.

Furthermore, both were debut issuers in the offshore bond markets, which underscored the allure of raising funds overseas with the fixed-income product. Bilt priced its perp at 9.75%, while Tata Power’s hybrid printed at 8.5% – both attractive rates for high-yield credits.

After all, with interest rates on the rise at home, Indian borrowers would be well advised to lock in long-term interest rates in the international markets. Whether or not the current form continues in 2012 is another question, but 2011 is set to be a blockbuster year in G3 bonds for India Inc.

“There is no better alternative than the G3 bond markets as the issuance window looks set to open in September,” said one DCM banker in Singapore focussed on South Asia origination.

“Liquidity is thin in the offshore loan markets with European lenders generally on the retreat from Asia due to problems back home, while interest rates in India are rising.”

“If Indian borrowers are realistic about their pricing targets, a lot can get done in international bonds,” said another syndicate banker in Hong Kong. “It depends on how open-minded and strategic they are in their approach.”

By Prakash Chakravarti, Credit Editor, IFR Asia

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