TO MUMBAI, where I’ve hosted two events in the past week: a roundtable on offshore equity and debt financing, and our annual Indian Credit Markets conference. While it’s always a hoot to spend time in this wonderful city, our credit conference had taken place on the anniversary of the series of dreadful terrorist attacks that resulted in the deaths of 164 people in Mumbai back in 2008 and in one of the locations that were attacked (the Oberoi/Trident).
On the heels of the Paris atrocities, that certainly offered ample grounds for contemplation. I had initially been moved to say something from the stage but opted against it in the end; a few people had mentioned it to me on the sidelines of the event so I knew it was on the minds of attendees so I took a ‘less is more’ approach; it just seemed to be the right thing to do. And besides, I didn’t want to sap or divert what were pretty good energy levels or create a downbeat vibe.
As regards financing markets, I’ve got to say the mood is broadly upbeat. It’s not a case that Indians are irrepressibly or blithely optimistic; that underplays the sophistication of their analysis. The bankers, issuers, investors and rating agency professionals who took to our stage are certainly cognisant of the pressure points in the domestic economy, of India’s vulnerability to external shocks, as well as the finance-ability of and financing channels open to India Inc and at what price, be it for domestic corporates, State-Owned Enterprises, or for infrastructure projects.
One thing is clear, though: after 18 months in office, Prime Minister Modi’s honeymoon period is over and harsh reality is starting to seep into the policy debate. Electoral hiccups in Bihar have certainly increased the pressure on the administration to move beyond the articulation phase and international rock-star populism to focus on execution of the bold policy reform agenda as the government moves into the second half of its term of office a year hence.
INDIAN CAPITAL markets have been relatively busy in spots year-to-date. Where they haven’t – syndicated lending for one – it hasn’t been for lack of financing availability at acceptable cost. Banks have plenty of liquidity for the right names with sound investment propositions. It’s more an issue of lack of demand driven by the mis-firing of the capex cycle. Once that takes hold, the notion of Indian corporates moving quickly into the cycle in short order and increasing their demands for financing as the process unfolds and leverages on itself seemed to be a popular stance.
The relaxation of External Commercial Borrowing regime is broadly welcome but is not expected to lead to a substantial uptick in offshore foreign currency borrowing away from the SOE-heavy Indian frequent borrowers.
The Masala bond concept, though, has definitely caught the imagination. As has been well documented, the likes of statist titans like Indian Railways, Power Finance Corporation and NTPC; or India Infrastructure Finance, Delhi International Airport as well as private sector names likes Bharti Airtel or Yes Bank have either stated an intention to tap the offshore rupee market or are actively engaged in the deal execution process.
There’s a shadow pipeline evolving too as investment bankers peddle the huge potential of tapping international investors for rupee funding. However, this won’t be a slam-dunk success. As the external environment tightens and alters the yield-seeking behaviour and appetite of foreign institutional investors, it’s by no means clear that the funding benefits afforded to all-comers to this not-even-yet nascent market will be able to realise a positive funding arbitrage.
Assuming the first wave of State-backed entities gets good execution, I will be keen to see whether Indian high-yield issuers will find favour with international investors in a second wave of issuance. On paper, it looks like a good bet; there’s no pricing cap on offshore rupee debt, which opens the way potentially for non-prime issuers to try their luck. While the domestic bond market is typically a closed avenue for such borrowers, it’ll be a question of whether offshore rupee funding can outplay the costs of domestic bank debt, which are slowly coming down.
Interestingly, there is an expectation that the government will continue to stand behind its state banks in the event of distress. India is a G20 country and is pushing along the Basel III route. That said, even though the hybrid capital instruments being rolled out world-wide will develop an Indian flavour, no-one is really holding their breath at this point for rupee-denominated Additional Tier 1 bail-inable instruments for domestic consumption, while it’s broadly accepted that Indian banks won’t have access to international foreign currency AT1 buyers at a cost that would make sense for them.
All-in-all, there’s a strong sense of latent activity around the corner as the supply of bank and capital market financing synchs up with investment demand. The government has taken steps to inject more capital into the state-owned banking sector at the same time as it attempts to deal with the heavy burden of non-performing loans that have beset the sector for years. One way, of course, to reduce the NPL ratio is for the banks to move into credit expansion mode.
If I were to summarise in two words the tone of the Indian capital markets as we head into 2016, it’s: Game On.
