Source: Reuters/Adnan Abidi
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As opposed to its regional peers, India’s footprint in the offshore public debt markets has always seemed somewhat fragmented. Issuance has tended to come from the financial sector, while the larger corporate issuers have emerged on only a sporadic basis, and the lack of an offshore sovereign curve remains a perennial frustration.
The absence of an offshore sovereign curve has again become a talking point in Indian financial circles.
Numerous market participants has suggested that India should tap the offshore public debt markets in big size, not only to help Indian issuers in terms of benchmarking but also to relieve the downside pressure on the rupee – the currency has fallen more than 25% against the US dollar since the start of August 2011.
A debut sovereign issue could make it easier for India’s corporate sector to access international capital – assuming their borrowings fit within some complex rules on overseas financing.
The Reserve Bank of India, however, has long stated that a benchmark-sized foreign currency-denominated bond would pressure the country’s sizable fiscal deficit, and there is no sign that it has changed that view.
Still, those DCM bankers hoping for a boost from a sovereign benchmark can take some heart from the likely arrival of a new sovereign proxy in the shape of India Infrastructure Finance Co.
IIFCL has sent out RFPs for the establishment of a US$1bn MTN programme and indicated its interest in ultra-long tenors of up to 30 years. This is something of a U-turn for the government-owned infrastructure lender, which was forced to abandon plans to make its offshore market debut when the global financial crisis kicked in over three years ago.
Barclays, Credit Suisse, Deutsche Bank, HSBC and Standard Chartered are working on establishing the MTN programme for IIFCL. Should the notes come with an explicit government guarantee, IIFCL would provide the first true India sovereign reference point for CDS, something which would aid in the pricing of Indian offshore debt.
Until now, market participants have had to rely on Reliance Industries default swaps as the most liquid India proxy.
The plan, however, comes against a deteriorating macroeconomic backdrop that threatens to push India into sub-investment grade territory after S&P put its BBB– rating on negative watch earlier this year.
“The India story began to unravel with the poor growth numbers late last year and, as a result, issuance plummeted, with just Reliance able to get a deal done [it issued a US$1.5bn 10-year Global in February] and banks the only issuers able to gain traction. With many Indian companies facing higher offshore funding costs on outstanding debt, thanks to the weaker rupee, it takes the shine off the country’s corporates as a credit proposition,” said a regional syndicate head.
Stalling growth and a series of crippling power cuts in late July, which affected more than 600m people, have added to the sense that a significant injection of funds into infrastructure is needed urgently. Offshore issuance could well emerge in this area, perhaps through public-private partnerships, especially with long-term rates so low.
Indeed, long tenors have been a feature of offshore issuance from India’s private sector, although it could be argued that these were bull-market trades when the BRICS economic miracle phase was at its peak.
In 1997, Reliance Industries placed a century bond and, two years ago, managed to get a 30-year Global over the line, while Ballarpur Industries tapped the perp market in August last year.
However, Ballarpur’s US$200m deal, which reopened the Asia high-yield market, after a two month closure, tanked in secondary and left a bitter taste that has lingered, with Bharti Airtel abandoning plans to launch a US$750m a few months later amid weak investor demand.
Since then, India’s GDP growth has begun to slow, cooling to 5.3% in the fourth quarter of last year and registering a 5.5% expansion in the first half of 2012 – the lowest in nine years.
National Thermal Power may be one source of new supply, with plans for a US$1bn deal. National Thermal is hoping to repeat the success of its US$500m 10-year, which pulled in US$2.7bn of demand in July 2011.
A new deal will help finance the country’s power infrastructure deficit, but the fact that National Thermal is government owned indicates that – for now at least – investors are looking at only the highest-quality corporate assets.
India’s banks, however, have been on a funding spree in the four weeks to August 22 during which bonds totalling US$3.8bn were issued. That has been hailed as a success, given the backdrop of rising NPLs at the country’s lenders, and DCM bankers remain hopeful of further positive moves to come.
“The volume of Indian G3 bond issuance has tended to be on the modest side in relation to some other parts of Asia, partly due to the level of withholding tax that issuers have to pay versus certain other forms of debt finance. Still, there are noises in the market place suggesting that the rate of withholding tax might be lowered, which could prompt a surge of G3 issuance from onshore Indian entities,” said Alexi Chan, head of debt capital markets origination at HSBC in Singapore.
All five deals – for Export-Import Bank of India, State Bank of India, ICICI Bank, Union Bank of India and Axis Bank – priced in the high Treasuries plus 300bp area. In a reflection of the perceived risks in the sector, the spreads were more than double those that Korean or Singaporean banks paid on new issues in the same period.