India’s orphan SPVs set to return
A couple of Indian issuers may test current appetite for the two-step orphan financing vehicle structure that was popular a few years ago, as domestic companies explore various formats to tap offshore liquidity.
Under the orphan financing structure, an Indian company sells rupee bonds and an offshore special purpose vehicle with no connection to the issuer buys the bonds and issues US dollar bonds to finance the purchase. In this way, onshore companies with no overseas subsidiaries are able to borrow indirectly in the offshore market.
The orphan SPVs register as foreign portfolio investors and are then able to buy onshore corporate rupee bonds under the voluntary retention route introduced in 2019. The FPIs are subject to a minimum retention period of three years and there are no regulatory restrictions on investment amounts and residual maturity under the VRR route.
Orphan financing vehicles were popular from 2017 to 2021, with issues by orphan SPVs based out of Mauritius such as Neerg Energy, India Cleantech Energy, Cliffton (later renamed India Airport Infra) and India Toll Roads which bought the rupee bonds issued by ReNew Power, India Cleantech Energy, Delhi International Airport and IRB Infrastructure Developers respectively.
After a lull in issuance, a couple of issuers are now looking to use the structure to diversify their funding, sources said.
Hella Infra Market, the owner of Infra.Market, an Indian tech start-up that supplies construction and building materials, is heard to be exploring a potential benchmark-size debut three-year US dollar bond using India Infra Buildco, an orphan financing vehicle out of Mauritius, according to market sources.
The funds raised from the dollar bonds may be used to subscribe to the rupee bonds of Hella Infra Market. The final structure and the format is yet to be decided and will depend on market conditions.
Hella Infra Market met fixed income investors in Asia for a non-deal roadshow last November that was led by HSBC.
The issuer is exploring the orphan SPV route to refinance a chunk of Rs33bn (US$381m) of bank lines which are due by March next year, ahead of a planned IPO, a source said. IFR reported in August last year that Hella is planning a US$600m–$800m IPO this year.
Separately, Shriram Finance is mulling a second asset-backed securitisation of at least US$300m from an orphan vehicle out of Mauritius after the success of its first deal in March last year, which came under the finance company's social finance framework. The funds raised from the dollar bonds will be used to subscribe to rupee-denominated senior pass-through certificates issued by a trust. Shriram Finance will be the seller and servicer of the certificates, the proceeds of which will be used to purchase a pool of commercial vehicle and construction equipment loans.
Hella Infra Market did not respond to emailed questions, while Shriram said it could not comment because it is "in a silent period".
"Some issuers may be still keen to diversify and raise money through offshore orphan SPVs if they find the end uses attractive, rates being more conducive or if their market positioning is right for raising USD bonds," said Manisha Shroff, partner in DCM, banking and finance at law firm Khaitan & Co.
Fundraising through orphan SPVs originally emerged because issuers could draw offshore debt without being constrained by a yield cap that applies to external commercial borrowings. The yield cap is 500bp over the relevant funding benchmark, but US dollar rates have risen since the last wave of orphan SPV bond issuance.
"The orphan SPVs worked for some issuers three years ago as those who used this route did not need to comply with an all-in funding ECB cap which was around 6%–7% at that time," a DCM banker said. "In the past year, the ECB pricing ceiling has moved to 9%–10%, making it easier for issuers to raise bonds directly."
The risks associated with orphan SPVs are well understood by the market as they get sold to institutional clients, bankers said. Moreover, there has been regulatory comfort as well, as the Reserve Bank of India has not flagged any risks after the initial circular in 2014 which highlighted that orphan SPVs and two-step structures should not be used to circumvent Foreign Exchange Management Act regulations.
"There was a lot of talk in the market last year regarding some additional criteria being introduced under the India-Mauritius tax treaty that could potentially impact tax treatment for Mauritius-based FPIs (but nothing has been formally announced in this regard) that led to some uncertainty for a while, and may have been a contributing factor in not many dollar bonds not being issued using the orphan SPV structure last year," said Rahul Gulati, partner at law firm TT&A. "The effective rate of withholding tax on interest payments under NCDs by Indian issuers to Mauritius based FPIs is 7.5% for the Indian issuer under the tax treaty."
Higher pricing
These structures became less appealing after international rating agencies rated their bonds a notch below the credit profile of the underlying entity to account for additional risks such as limited recourse as an additional layer (orphan SPV), is slightly further away from the cashflows and pure operating company.
"We believe that the orphan financing issuer provides less protection to offshore US dollar note holders in case of failure of a hedge counterparty and termination of its hedge agreements before the notes mature. In contrast, if the offshore SPV is a subsidiary, the Indian parent can provide support in such instances," said Muralidharan Ramakrishnan, senior director of Infrastructure and project finance for APAC at Fitch in Singapore.
Most of the deals in the past by orphan SPVs were usually priced at higher yields and traded wider than the dollar bonds of the parent or the issuer.
"The coupon rates these issuers pay in offshore orphan deals is comparatively much higher including the hedging cost," said Shroff at Khaitan & Co. "There are costs such as set-up costs, withholding tax, hedging cost, the timeframe to do a deal increases and also compliance increases for getting those structures internationally rated," she said.
Another reason these structures were not popular is because issuers from the renewable energy and infrastructure sectors were easily able to access the rupee market at attractive rates to meet their funding and refinancing requirements.
"Many Fitch-rated entities have raised onshore financing over the last two years given the relatively cheaper local currency funding costs and strong domestic liquidity," said Ramakrishnan.
Offshore deals by Indian issuers in the last two years were mainly through direct issuance or through an offshore subsidiary owned by the parent via a two-step structure.
"Under the two-step structure, the offshore SPVs are typically fully owned by the parent/group and are set up mainly for financing. In this format, the offshore SPV issues foreign currency bonds and subscribes to the NCDs onshore issued by onshore operating entities," Ramakrishnan said.