THERE WAS A time when international investors could only grab a piece of high-yield Indian credit by way of private placements. This was prior to the financial crisis, when Asian origination bankers used to crow that the public markets told only a fraction of the story. They had done oodles of off-radar private placements for Indian companies, often with internal rates of return in the 20% ballpark through juicy warrants or other sweeteners.
So they said. It’s a wonder quite why any business was done at all, given that issuers would have had to pay a 20% withholding tax on coupon payments.
Flash forward six years-odd and Indian public high-yield looks set to become the latest G3 debt bonanza. I’ve written in this column before about the knock-on effects on Narendra Modi’s election victory on Indian credit, and I really don’t want to repeat myself. But please. Do me a favour. Does anyone imagine for one moment that the election of this man can somehow magic Indian high-yield into credit nirvana?
If there is indeed an India high-yield bonanza, then good luck. The timing is certainly convenient, at a time when corporate balance sheets have been stretched to the limit by last year’s rupee meltdown, and when local banks are tightening their belts. The idea of a high-yield bond probably appears to many corporate treasurers as a knight in shining armour riding in on a handsome steed. But I suspect that, somewhere down the line, the more appropriate metaphor will be that of a dodgy bloke astride an old nag on the way to the knacker’s yard.
If there is indeed an India high-yield bonanza, then good luck
JUST OVER A week ago an Indian company called JSW Steel priced a US$500m five-year Reg S bond amid rapturous demand and breathless commentary from the sell-side bankers involved in the trade. The 4.75% coupon on offer looked pretty punchy, even in relation to the initial 4.875% guidance that was released on the trade.
The deal got some traction from the expected Ba1/BB+ ratings from Moody’s and Fitch and the apparently decent value offered to major competitor Tata Steel’s implied secondary curve – a pick-up of around 50bp – allowed JSW to get away with a covenant-lite deal. Cash leakage is a risk on the paper, there is no restriction on subsidiary debt, and a leading analyst suggested that JSW’s interests were more inclined towards its shareholders than debt investors.
Still, it looked perhaps a better punt than taking on board China property risk, where structural subordination to onshore creditors is still a given and sector sales are slowing.
Meanwhile, the fabulously named Indiabulls also brought a deal around the same time, opening up the India property high-yield sector. This was a relatively dainty US$175m trade, with a five non-call three structure. Tellingly (in my book) the deal was reduced in size from a planned US$250m due, one suspects, to a soggy investor circling process.
The Indiabulls deal features an onshore parent guarantee, which in theory places the debt pari passu with the company’s onshore credit. It’s a nice idea, but this has not been tested before in the Indian courts, and frankly I would rather have prolonged root canal work than subject myself to the whims of Indian red tape, whatever the yield on offer.
THESE TWO DEALS are a tribute to the power of a policy move. By reducing withholding tax for offshore issuance from 20% to 5%, it now makes sense for many more Indian companies to issue offshore debt rather than rely on the same banks funding that they have for decades, assuming you can get yourself a competitively priced hedge.
Still, one wonders just what investors will be thinking when they contemplate the next contenders in the India high-yield primary public market bond bonanza. Business process outsourcer iEnergizer is next on the blocks, so we may get a clearer idea of what is making this nascent market tick.
JSW Steel, for example, upped its net leverage to 4x in the fiscal year ended in March (its last reporting period) and has subtantial capex plans committed. To my mind that is an extremely dangerous gearing level and one that I’m frankly astonished the offshore investor community was willing to stomach in booking the newly minted paper.
The paper traded down in secondary on the break, and I’m not really that surprised. You can engage in the latest fad in primary debt markets in Asia relatively easily in terms of hype. The Modi effect, scarcity value, need for investor diversification and so on. I have seen it all before.
But the biggest judge as always will be the secondary market. In this case it voted with its feet, and I suspect that will be the way going forward. Were I a fast money guy, I’d be on the prowl to short the hell out of all this stuff, regardless of whether or not I believed in the arrival of a new high-yield asset class.
