Thursday, 23 November 2017

IFR Outlook for Indian Borrowers Roundtable 2016: Part 1

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IFR: What does the borrowing landscape look like for Indian issuers in 2016?


Vikas Halan, Moody’s: The demand and supply of credit in 2016 will be lower than 2015 and the Fed rate hike will likely alter the funding mix from more offshore to less offshore. As we saw in the last policy statement, higher Fed rates at a time when the global economy is not doing that well plus the need to protect the Indian economy led to that 50bp rate cut by the Reserve Bank of India in September 2015.

If we extrapolate that, the Fed rate hike will probably see looser Indian monetary policy so a greater supply of credit will be available for Indian borrowers onshore.


Philippe Ahoua, IFC: Higher US interest rates obviously are going to discourage borrowers all over the region from borrowing in international currencies, which from the IFC perspective, is a good thing. On the basis of the corporates we interact with, Indian banks have taken a fairly aggressive stance in terms of lending to corporates domestically.

We’ve also seen a lot of interest in the domestic corporate bond market, and from second-tier credits that we talk to in some other markets such as the Masala bond market. In terms of borrowings, it should be a fairly active year for Indian corporates on the back of that rate cut.


David Rasquinha, Export-Import Bank of India: I’d always felt that when the Fed rate hike came, it would be a non-event that had already been pretty much priced it into the market’s reckoning. I agree with Vikas: it’s going to be onshore. An important point here is that Indian bank deposits are growing faster than the rate of growth of advances, and this has been the case for close to two years now so there is plenty of liquidity.

But demand has not really been there. Maybe one of the reasons is over-leveraging, and also because rates have been high. As the Reserve Bank reduces rates, you will probably see some of that slack being picked up.


Nipa Sheth, Trust Group: We were hoping that December 2015 would see be a Fed hike, an event that had been talked about for more than 18 months so there was already a lot of discounting. Even though India has cut 125bp since the beginning of 2015, in terms of government securities we are at almost the same levels as we were before the cuts.

The thing is: India is seeing among the highest real interest rates we’ve seen in the last decade. By changing to CPI from WPI, the effective rate of interest has changed significantly. In terms of borrowing, we feel the government investment cycle is due to start. In fact, they’ve already started in the railways and roads in the first cycle of borrowing.

Privately-owned promoters will probably also prepare for the investment cycle two years down the line so a lot of mature projects should come into the bond market from the bank market. Eventually, our sense is that you will see a lot of bank funding moving to lower interest-rate bond funding.


Sanjay Guglani, Silverdale Capital: I agree with Nipa. The key thing to observe is in terms of real interest rates, which are among the highest India has seen in the last few decades. Having said that, I would put forward two points.

Number one is if you look historically, whenever India’s financial condition has been positive, increases in the Fed rate haven’t impacted much whether that was 1999 or 2004. So purely from a global perspective, we do not see a Fed rate hike having a major impact on Indian corporates.

Having said that, intent and requirement are two different things altogether. Does India need to go offshore to borrow? Maybe not since, as correctly pointed out by my colleagues here, there is ample liquidity to take care of the first tier of growth, which is just kicking in.

But the key problem I have is the issue of intent. It is the right time for the government to explore active shifts in terms of the internationalisation of the market. Masala bonds are a good start. But they should work more in terms of creating a sovereign yield curve, even if it’s using quasi-sovereigns such as ExIm, or SBI. The point is you cannot dig the well when you’re thirsty. 2016 is a fantastic time for India to come to the global markets and establish a benchmark that will help when it requires funds in late 2017, early 2018.


Anjan Ghosh, ICRA: India’s credit growth right now is quite sluggish and deposit growth is at least a couple of percentage points higher than trade growth. So combined with the fact that the investment cycle continues to be very sluggish, there is not really much of a requirement in terms of tapping the offshore market.

Looking at some statistics, the overall FII flow in the equity and debt market in 2014 was something like US$45bn. In 2015 to-date, it’s hardly anything. There are probably reasons both on the equity side as well as the debt side but there has been hardly any inflow on a net basis. So to that extent, I don’t think the additional Fed rate hike will really have so much of an impact. In fact, I would worry more about the impact it has on the exchange rate and the unhedged foreign currency exposures of Indian corporates.


IFR: Are there any sectors in particular in India which are more prone to interest rate risk?


Anjan Ghosh, ICRA: We are at the high end of the rate cycle. Interest rates have started coming down and the general consensus it that they are going to trend down further. So we are going to see some benefits for highly leveraged corporates. My personal feeling is that leverage levels are so high and Ebitda so low that a few basis points here and there won’t really make a difference.

The rate move in India will possibly make more difference in terms of giving an uplift to consumer sentiment. Some of the consumption-oriented sectors like automobiles or real estate might get a bit of uplift from interest rates in India coming down.

More importantly and more germane to the topic we are discussing today, because of a reduction in interest rates, we would possibly see more refinancing activities in the bond market i.e. more bank loans being replaced by bond market issuance especially for projects which have completed and which have a one or two-year track record of operations. That is a trend which we’re already seeing in the last one or two years. And that is a trend, which is likely to get a fillip going forward.


IFR: I wanted to take a step back and look at the regulatory environment in India. What are the key elements that you would point to?


Vikas Halan, Moody’s: Borrowers are still constrained, especially when it comes to foreign currency issuance under the Reserve Bank’s ECB guidelines. Just look at the restrictions that are placed on borrowers. There are end-use restrictions; there is an all-in cost ceiling; and you have very steep hedging costs. All of these combined make very little sense for someone to borrow in foreign currency and hedge versus borrowing in domestic currency. Only companies that have natural hedges can actually borrow in foreign currencies so that would mean commodity companies.

Now so far as reforms are concerned, what we have clearly seen is the government moving on some of the immediate issues it faced. One was, of course, the Coal Block Auction and the metals and mining bill [Mines and Minerals Development and Regulation Bill]. What it hasn’t yet been able to do, of course, is the Goods and Services Tax (GST), the land acquisition and other Big Bang reforms that it promised.


Philippe Ahoua, IFC: As a multilateral development bank, we’re in a different position to fellow panellists. And also as a development bank where the Indian government sits on our board, I’d be very remiss to say that the experience and what it has done has been anything other than positive.

What has changed is the regulatory framework, the environment and the mentality, both at the Reserve Bank and the Ministry of Finance, as far as development of capital markets. When we started our Masala bond programme in 2013, we saw a shift in the regulatory mindset, and in terms of non-residents looking to develop the offshore bond market. So that’s been very helpful.

In November 2015, the RBI relaxed some of the regulations around multilaterals providing hedging products to certain projects in India. I think that’s a really big development for us, because it allows us to mobilise funds for projects in places like Japan with non-development bank and non-traditional borrower/lenders in India.

Loosening the former FII license, which is now the FPI, has also been very helpful. It’s helped us play a bit more in the corporate bond space and support certain bond issuance by domestic corporates. So in general for us, it’s only been a positive as far as the mindset of the regulatory environment in India.


David Rasquinha, Export-Import Bank of India: I’m pretty much with Philippe on this. We’re a different kind of animal from a typical Indian borrowe, in that the business driver for us is exogenous. It is project exports internationally. And where the government comes in is in terms of policy, in terms of its overseas development assistance, lines of credit to African countries; the strategic initiatives on project exports in the SAARC (South Asian Association for Regional Cooperation) region. So it’s not really a function of the regulatory environment as much as the government’s policy direction.

And there we are seeing a lot of movement. We had the India-Africa Forum Summit recently, where the prime minister announced Rs10bn. We’ve launched a new scheme for the SAARC countries to build up project exports. For me, that’s extremely positive but it has nothing to do with the regulatory environment.


Nipa Sheth, Trust Group: I’ll restrict my comments to changes that have impacted the bond market. Masala Bond developments are one area; partial credit enhancements will go a long way in terms of infrastructure projects, while allowing foreign investors to buy distressed or defaulted bonds is another. Also, I think the repo guidelines which are expected to come soon will change a lot in terms of the bond market.


Sanjay Guglani, Silverdale Capital: We’ve seen a lot of positive developments and hopefully more will come through. For us as foreign investors, the biggest concern in India has always been in terms of policy flip-flops. My biggest worry in India is not what the government will do in terms of the future. My biggest problem in India is what the government will do regarding the past. We have seen it in a small way in GAAR (general anti-avoidance rule), which gets postponed every few months. And then of course we had the great Minimum Alternate Tax (MAT) saga.

I’m often asked: “Since you run such a large US oil book and being of Indian origin, why don’t you launch an India fund?” My answer is this, “I cannot run a fund with a one-year duration. How can I open a new fund let alone a long-term fund if the policies are for less than one year?” We talk about withholding tax at 5%, and then put a caveat of trickle-down in 2014/15/16 but we don’t know what it is. My biggest worry is whether, talking about 2016, I have a guarantee that it will be 2016. The answer is no. So the problem we face as investors is more to do with administration rather than purely in terms of policy.

Taking a step further, I fail to understand how anyone can be blind to the fact that overseas venues, whether it’s the Singapore exchange or the Dubai exchange, end up having more trading than India on, for example, Nifty. Or in USD/INR. Why should it be exported to Singapore? I’m proud of Singapore. I live in Singapore. But can’t we have regulatory frameworks to enable us to hedge onshore?

And then we have a crazy thing called the ‘FI restricted list’. So every morning I have to look at my FI restricted list to know if I’m restricted from buying or not. India is a very interesting country to work in and it offers us huge opportunities. But when I work in Cayman, I get 35 years’ definitive tax rates; in India, I don’t have 35 weeks’ definitive tax rates.

Is the government doing well? Yes. It has done fantastically well. The biggest thing they’ve done is in terms of the monetary policy framework around RBI. But let me remind you, this framework was mooted way back in 1963, so it’s taken us quite a few years to get this finally signed. But I’m glad we’ve got there. RBI knows what they’re supposed to do; that’s a very positive step. And like any growth, there are two steps forward, one step back. Which is perfectly fine, as long as you’re going forward.

What is required in India is not in terms of politicians. Politicians are supposed to provide strategy. What India requires is administrators. Here’s a pointer for you: we had exactly 4,802 officers in the Indian Administrative Service as of January 2015 to run a country of 1.26 billion people.


Anjan Ghosh, ICRA: Just to add to what Sanjay said, regarding the monetary policy framework. I think one of the biggest achievements of this government has been the single-minded focus – and I mean government as well as RBI – on inflation. Even though people generally attribute progress to tailwinds in the form of lower oil and commodity prices, I would like to believe that there have been a lot of other steps taken by the government in terms of restricting minimum support prices.

India will shift from consumption-led growth to investment-led growth; hopefully that growth will come soon. That has really played a huge role in terms of bringing down inflation significantly and it has an impact, not only on the economy but also on the investment cycle as well as the interest-rate cycle. That is one of the most important achievements of the government, which is often passed off as a collateral benefit of lower oil prices.

I’d like to elaborate on another element, which Nipa has already mentioned. The government and RBI have taken a lot of steps in terms of kick-starting the bond market. Nipa already mentioned the partial credit enhancement schemes. Then you have increased limits for FIIs. Of course, there are caveats, which Sanjay has mentioned.

Then there was the recent RBI discussion paper encouraging corporates to look at borrowing part of their working capital requirements from the bond market, while SEBI has recently framed the guidelines for the municipal bond market. And we’ve Infrastructure Investment Trust (InvIT) developments. A lot of incremental steps are being taken to relieve the stress on the banking system and to ensure that the bond market develops.


IFR: Total G3 bond issuance by Indian borrowers was US$17.5bn in 2014. In 2015 year-to-date, the number is US$8.3bn, according to Thomson Reuters. If you look at the quantum of US dollar bonds maturing in the next two years, US$7.2bn falls due in 2016 and another US$3.4bn in 2017. What can we expect to see in term of issuance in 2016? Could Indian borrowers breach the offshore issuance peak we saw in 2014?


Sanjay Guglani, Silverdale Capital: There are a couple of factors. First is the issue of supply. We don’t see any major activity in terms of the M&A sector that will require a huge amount of funding for offshore acquisitions by Indian firms. Having said that, we will see certain companies looking to internationalise their books. Bharti is a classic example; the company has done a fantastic in creating a yield curve for itself and that will pay dividends in the long term.

The next dimension to look at is asset-backed borrowing. This is an area where India has lagged other economies and where I see maximum scope for improvement, notwithstanding my previous caveat in terms of policy flip-flops.

So we saw an SLBC-backed deal for AE Rotor but the RBI banned it; we saw a deal for DLF and RBI banned it; we also saw that IFFCO deal with Credit Suisse, but the RBI banned it. We’ve had around 15 examples but one solitary deal done. This doesn’t look good because the idea is to develop the market.

It’s important to have the framework laid out. As you’re aware, unlike in the US where just 25% of the US debt requirement is met by the banks, in India 75% and above comes from the banks. If we have strong enforcement in India, if bond covenants are tightened, we will see the market deepening and things will take off.

Our biggest problem is that we require a premium because of enforcement costs. There are something like 30 million cases pending in various courts in India and some take years to resolve so we require a certain risk premium to be motivated to go onshore.

The only jack in the pack could be what Nipa presented earlier, in terms of real interest rates. If real interest rates in India go high, it could change the picture when the corporates start looking in terms of the offshore market.


IFR: How do you see the scenario in 2016, David?


David Rasquinha, Export-Import Bank of India: As a borrower, as I said before, our mission is exogenous so I’m probably not a good benchmark. But if you ask me in general and referring to the numbers you quoted, I suspect 2014 was a bit of an outlier. Two possibilities – and sticking my neck out a little here. At the end of 2013, the rupee had plunged to all-time lows so a lot of the slack in terms of the anticipated depreciation had worked its way through the system. There was a little more appetite for taking on exchange risk.

Secondly, the new government generated a lot of euphoria in 2014, some of it a little irrational. I think the two contributed to a rise in foreign currency issuance in 2014. So it’s probably not the best benchmark to evaluate against.

For 2016, there are a few factors. Capacity utilisation is still extremely low. The RBI governor recently said that it’s around 70% although it differs from industry to industry. Business isn’t doing too well and investment is not happening much, either. Projects are stuck and new projects are not coming up. So no operational demand, no investment demand. I would suspect you’re really going to see refinancing demand. That’s really going to be the driver in 2016.


Vikas Halan, Moody’s: Demand on the investment side looks quite weak. If you look at the sector composition of foreign currency issuance out of India, nearly 60% comes from commodities. A lot of it has been acquisition-related issuance by oil and gas companies such as Reliance, ONGC and Oil India. We’ve also had the likes of Vedanta and Tata Steel. So nearly 60% of issuance from India came from the oil and gas or commodity sectors. And then you have the banks.

You will see refinancing but beyond that, it doesn’t look like there’s much M&A activity in the pipeline, as Sanjay mentioned, nor major investment projects. So 2016 will not see a topping of 2014, and maybe not even 2015.



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