"The primary reasons why CB issuance volumes from Indian companies have dwindled this year are the current market environment and the Indian regulatory framework." said Anandh Haridh, director, ECM, at Merrill Lynch.
"It is a difficult year for investors as well and as a result there is appetite only for some issues at terms that are reflective of the conditions. Still, this is a process of mean reversion of cost of capital. Companies will over time understand and adjust to that and
pipeline will build again, maybe more selectively to begin with, as companies aim to continue their growth trajectory".
Thomson Reuters data shows year-to-date Indian CB issuance at just US$472m, which is a fraction of the US$6bn booked in the same period last year. Although a fall was expected, its severity has surprised bankers.
Over the past four years coinciding with the boom in the country’s economy, Indian issuers have piled into the offshore markets to issue equity and equity-linked instruments or raise cheap bank debt to fund growth. The Reserve Bank of India (RBI), however, has clamped down on such borrowings through measures aimed at minimising the economy’s exposure to excessive short-term foreign debt.
Some of these rules have been eased in recent months but given that credit markets have turned their nose away from mid-to-low-tier credits and stocks have corrected significantly this year, bankers said achieving the regulatory issuance parameters in offshore markets is difficult.
According to the RBI’s external commercial borrowing policy, more than US$20m per company per financial year would be permitted only for foreign currency expenditure for some pre-set permissible end-uses like offshore acquisitions or to refinance foreign debt. Proceeds should be parked abroad to cover foreign currency expenditure and cannot be remitted to India. There are other limits like US$500m per company per financial year under the automatic approval route, average maturity period of five years and all-in cost ceiling of 350bp over Libor.
Indian issuers have struggled to meet these onerous requirements because they would need to have an offshore investment purpose or refinancing purpose and even if they met that rule, they would still have to issue within a certain credit spread and tenor which is near impossible to achieve in the current markets.
This is why the only sizeable offshore CB to get done this year has been Geodesic Information’s US$125m CB due 2013. The conversion premium was fixed at 35% and the bond yielded 6.6%. No credit protection was provided. Proceeds are for overseas acquisition, which got the issuer around India's ECB rules that limiting offshore debt raising to specific purposes like offshore acquisitions.
"It will take time before the G3 CB market becomes as active as it was in 2007 because there are too many variables that need to be corrected before issuance can resume again," said Ravi Kapoor, head of Indian capital markets origination at Citigroup.
"Issue supply would increase if there is some sort of semblance in the secondary market levels of outstanding CBs which are out of the money currently. At the moment, a quick turnaround in issuance sentiment looks tough unless there is also a sustained stability in the credit and stock markets."
Apart from the regulations and bad markets, bankers said the issue was also the sheer reluctance among Indian companies to accept valuations that were more reflective of the current market conditions.
“Indian issuers just do not understand that the market dynamics have changed dramatically over the last year since the sub-prime crisis,” said one banker. “There is no stock borrow in many Indian mid-cap companies and getting credit support on Indian deals is next to impossible now given CDS spreads have jumped to over 500bp currently. But even in this climate, Indian issuers want to issue CBs with 40%-50% conversion premiums and low yield.”
And time is running out, especially for those companies that had issued several CBs in the last few years that need to be refinanced. It is crisis time for Indian issuers and bankers expect problems to start early in 2009 when several deals issued in 2004 come up for refinancing or payments.
Ironically, 2004 was a landmark year for the Indian CB market because that was the year the regulator’s new CB liberalisation caught India in a massive equity upswing. Hundreds of companies were busting to raise offshore cash for, in many cases, an offshore expansion. Many of these issues are now trading under water.