Monday, 23 July 2018

India 2007: Bank issuance dominates

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Indian offshore G3 bond issuance has taken off this year, with volumes so far almost double of what was printed in all of 2006. Bank capital raising to comply with Basel II explains this surge in volumes, however, and there remains a sense that much more issuance should have come from this awakening giant of a country.

Up until last year, annual issuance volumes from India were scrappy, with on average around US$500m printing each year from 1994 until 2004, when US$1.6bn got done, followed by US$1.09bn in 2005 and a leap to US$3.4bn last year, from 16 deals.

Meanwhile, so far this year US$6.2bn has printed via 17 deals, with bank issuance dominating, led by ICICI which has bought US$3.14bn of deals this year. This borrowing binge has been complemented by the bank’s frequent use of the offshore syndicated loan market.

ICICI managed the distinction in January of issuing the largest offshore public bond from an Indian borrower, and the largest single currency FIG issuance out of ex-Japan Asia with a US$2bn global multi-tranche issue, which came via Citi, Deutsche Bank and Merrill Lynch. Not only did the deal’s size make it a watershed for the nascent bank capital space, but the approach to pricing that the bank’s treasurers adopted was particularly savvy.

Funding levels were highly competitive, with ICICI achieving a Libor plus 54bp cost on a senior three-year FRN, at Libor plus 75bp on a five-year fixed piece and at Libor plus 128bp on a 15-year non-call 10 piece.

Indeed, if there are any complaints about the flood of bank issuance which has come out of India since the Reserve Bank of India eased regulations in August last year it is that the borrowers have tended to be ludicrously penny pinching, with a string of deals breaking to the downside soon after issuance and subsequently widening in secondary trading in the following months.

The worst example of over-ambitious pricing came from Bank of India, in September last year, when it brought what was just the third subordinated Indian FIG deal. The US$240m15-year non-call 10 Upper Tier 2 was brought at mid-swaps plus 138bp and ballooned out 8bp the next day.

“Clearly the leads weren’t paid enough to encourage them to support the deal and the whole exercise is a lesson in the dangers of participating in India bank capital where these new issuers are over-valuing themselves,” said a regional DCM banker soon after the bond priced.

And in the recent round of credit re-pricing in Asia, induced by the sub-prime rout, Indian bank capital credit protection has soared and cash spreads blown out thanks to the huge supply the India FIG space has brought in less than a year, with the sector underperforming the rest of the region’s investment-grade space.

Still, it is not easy to get interest-bearing credit exposure to India outside the bank capital space, with the only available paper with any degree of liquidity from just four issuers: Reliance Industries, Tata Group, Vedanta and National Thermal Power Corp.

“Indian corporate borrowers have favoured the syndicated loan market because it offers much more competitive pricing than that offered by the G3 bond markets. At some point they should turn to bonds however, simply because they need to diversify their investor base and the lighter covenants required on bonds versus loans will begin to appeal,” said a Singapore banker.

Indian real estate is a much-hyped sector in terms of its likelihood to produce the next wave of chunky issuance, much as real estate in China has been a fertile source of paper. But the sector has not been opened up yet, mainly because the RBI cap on borrowing levels of Libor plus 250bp has precluded issuers from being able to print the coupon levels required by high-yield investors.

“Everybody is always saying this is going to be the big year for India real estate issuance but it just doesn’t happen because of the cap. Moreover, changes to offshore borrowing regulations announced by RBI in late May have completely barred the Indian property sector from borrowing overseas,” said a Hong Kong hedge fund manager.

That is a moot point given the country’s massive infrastructure needs over the next 10–20 years, with estimates suggesting India requires something in the region of US$2trn of infrastructure investment over that period if economic growth rates are to be sustained.

Interestingly though, progress has been seen in the private market, with Indian corporates reportedly printing three times the volume of private deals this year, largely on the back of reverse enquiry from Asian hedge funds and real money.

Jonathan Rogers

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