IFR Asia Outlook for Indian Borrowers Roundtable 2016: Part 4

IFR: Interesting point. RBI has not allowed Indian banks to tap the Masala bond market, for AT1s. But they should probablydo that.   Sanjay Guglani, Silverdale Capital: Masala bonds are too hot for us. My investors are US dollar-denominated investors. If I were to buy NTPC bonds at 8%-8.5% and hedge I would make about 2%-ish. As of yesterday evening, NTPC’s July 21 bond was giving me 3.61%. I dare not go there. As Nipa said, there is appetite for long duration local currency bonds. And as correctly pointed out, the right people to do a Masala bond are those who can diversify their investor base rather than benefit on rates. That’s a key thing. On the Dim Sum points that Philippe touched on earlier, let me remind you of two very important things that allowed the market to grow something like 100-fold in three years: intent and vision. When China stared talking about the internationalisation of the yuan they went to a lot of countries and signed dual-currency pacts. That’s the intent part. They came to Singapore and they offered us a post-hedging uplift of about 20bp-25bp. People like me flocked to it. They did billions in two and a half months. That’s the vision. Until recently, we’ve had a liquid Dim Sum market. We don’t see anything like this happening in India. Rather, the guidelines which came out were: “OK you have to run. I’ll hold both your hands and both of your legs. Now run”. There were so many restrictions out there.   Philippe Ahoua, IFC: Just to add to that, you saw the announcement regarding the Special Drawing Rights and the renminbi. The Chinese government, for all intents and purposes, had made a decision to internationalise the currency. Vikas mentioned that that is too premature in India. So until the government of India decides that the rupee needs to be internationalised and supports that mechanism, the Masala bond market is not going to grow off of the back of the IFC, the World Bank, ADB, Triple A and other Indian corporates. You have to have the sovereign supporting the market, providing liquidity and providing a sovereign yield curve off of which pricing is going to happen, similar to what’s happening domestically in India.   Sanjay Guglani, Silverdale Capital: Beyond the requirement of formal regulation and support, which is absolutely critical, I would say the basic thing they need to do is in terms of free rupee hedging. You cannot stop me from hedging. Why pretend?   Philippe Ahoua, IFC: It’s worth mentioning that the Philippines had large funding requirements a few years ago and issued in that format in the offshore market. So you may not want to internationalise your currency but some of your domestic funding requirements could also justify some sort of internationalisation of the currency. So there are a lot of different factors that can play into that process.   IFR: Sanjay, what is your outlook on Indian credit?   Sanjay Guglani, Silverdale Capital: I am bullish by default and by design. The reason I’m bullish by default is because when I run such a big bond fund, I need diversification so whether I love it or hate it, I need to have India paper on my books. I’m bullish by design because we see fantastic credit quality from India, and that’s partly because the sovereign is rated investment grade, at Triple B minus. Many Indian corporates could technically be better than Triple B so when they go and try to price their securities in the international market, they’re able to get close to Triple B but not close to what would be effectively that real cost. The other thing I am bullish about is the economy. I am passionate about India. That’s why I talk about what can be done. There is no denying that we’ve seen a huge amount of changes taking place. I firmly believe India is turning around in 2016 and 2017. The future looks bright.   IFR: How can we compare the relative costs of funding offshore versus onshore for Indian borrowers?   David Rasquinha, Export-Import Bank of India: I’ve been a bit of a

IFR: What about appetite for high-yield from India?   Vikas Halan, Moody’s: One of the issues for high-yield issuers is the all-in cost ceiling, meaning they have to borrow within the 500bp limit set by RBI. That limits the overall universe to very few issuers in our high ‘Ba’ category, or you have issuers like Indiabulls and Lodha that used structures that are not captured by ECB guidelines. Those kinds of activities are also tied to investments overseas that don’t seem to be happening at the moment, which, in my view, is a little bit puzzling, because if you look at global asset valuations, especially on the commodity side, it’s getting very attractive. We might end up seeing more M&A as we get closer to the end of 2016, which would increase the demand for credit.   Nipa Sheth, Trust Group: When investors talk about the high-yield space, I don’t really understand what range they’re looking at. If you look at bond funding relative to bank lending rates, most Triple A companies can borrow at around 100bp lower in the bond market than they can get from the banks. If you look at the universe of rated companies, only 10% would be Double A and above. Bank lending rates for companies rated Double A and below are not as high as levels in the bond market, which prices spreads at much higher levels. So none of those companies actually access the bond market because bank funding lines are anywhere close to 10%, 11%, at the most 12% whereas the bond market probably does not have appetite at Double A minus and below. When foreign investors are asking for higher yields, the expectations are high teens. The only space that has been able to offer that kind of yield is the real estate market because the banking sector doesn’t have capital to give to the real estate sector. Therefore we do see very attractive deals coming from a real estate side that get into the high teens. But anything between 12% and 16%-17% is missing from the Indian market because bank funding lines are available at lower rates. So unless there is an active repo market below Double A, you will never see these companies tapping the Indian bond market. Bank credit will always be a very big part of it – unless the partial guarantee scheme changes things.   Anjan Ghosh, ICRA: I agree that 2014 issuance seems to have been an aberration. But since interest rates are coming down, local issuance will become more attractive. But even if the investment cycle revives, the market will continue to be dominated by bank loans for quite some time. I don’t really see bond issuance supporting investment activity.   Philippe Ahoua, IFC: A lot of people have been talking about the Fed increasing rates. But what’s interesting is what the Fed does going forward, and what the American economy looks like. There will clearly be a refinancing need. The challenge is going to be whether that refinancing need is going to happen offshore or onshore. And is it going to happen in the form of domestic bond markets or in the form of bank loans? From a development institution, we’d like to see more of it happening in the bond market, rather than more bank financing. That’s been a challenge in this whole region. This region is dominated by bank financing, and we want to see more of that being refinanced in the bond market. But just to confirm what the panellist have said, that is a challenge in India, because like in other countries in Asia, it’s all locked in to bank financing for various reasons.   IFR: If you look at the onshore numbers for 2014 and 2015, rupee bond offerings amounted to RS2trn in 2014, around US$30bn equivalent. In 2015, so far, we have issuance of RS2.3trn. And we have RS1.4trn and RS1.3trn of rupee bonds falling due in 2016 and 2017 respectively. If you look at the loan markets, we saw US$50bn equivalent volumes in 2014 against US$30bn 2015 year-to-date. we have rupee loans of US$9bn and US$10bn maturing in the next two years. Given this backdrop and India’s growth prospects, are

IFR: What does the borrowing landscape look like for Indian issuers in 2016?   Vikas Halan, Moody’s: The demand and supply of credit in 2016 will be lower than 2015 and the Fed rate hike will likely alter the funding mix from more offshore to less offshore. As we saw in the last policy statement, higher Fed rates at a time when the global economy is not doing that well plus the need to protect the Indian economy led to that 50bp rate cut by the Reserve Bank of India in September 2015. If we extrapolate that, the Fed rate hike will probably see looser Indian monetary policy so a greater supply of credit will be available for Indian borrowers onshore.   Philippe Ahoua, IFC: Higher US interest rates obviously are going to discourage borrowers all over the region from borrowing in international currencies, which from the IFC perspective, is a good thing. On the basis of the corporates we interact with, Indian banks have taken a fairly aggressive stance in terms of lending to corporates domestically. We’ve also seen a lot of interest in the domestic corporate bond market, and from second-tier credits that we talk to in some other markets such as the Masala bond market. In terms of borrowings, it should be a fairly active year for Indian corporates on the back of that rate cut.   David Rasquinha, Export-Import Bank of India: I’d always felt that when the Fed rate hike came, it would be a non-event that had already been pretty much priced it into the market’s reckoning. I agree with Vikas: it’s going to be onshore. An important point here is that Indian bank deposits are growing faster than the rate of growth of advances, and this has been the case for close to two years now so there is plenty of liquidity. But demand has not really been there. Maybe one of the reasons is over-leveraging, and also because rates have been high. As the Reserve Bank reduces rates, you will probably see some of that slack being picked up.   Nipa Sheth, Trust Group: We were hoping that December 2015 would see be a Fed hike, an event that had been talked about for more than 18 months so there was already a lot of discounting. Even though India has cut 125bp since the beginning of 2015, in terms of government securities we are at almost the same levels as we were before the cuts. The thing is: India is seeing among the highest real interest rates we’ve seen in the last decade. By changing to CPI from WPI, the effective rate of interest has changed significantly. In terms of borrowing, we feel the government investment cycle is due to start. In fact, they’ve already started in the railways and roads in the first cycle of borrowing. Privately-owned promoters will probably also prepare for the investment cycle two years down the line so a lot of mature projects should come into the bond market from the bank market. Eventually, our sense is that you will see a lot of bank funding moving to lower interest-rate bond funding.   Sanjay Guglani, Silverdale Capital: I agree with Nipa. The key thing to observe is in terms of real interest rates, which are among the highest India has seen in the last few decades. Having said that, I would put forward two points. Number one is if you look historically, whenever India’s financial condition has been positive, increases in the Fed rate haven’t impacted much whether that was 1999 or 2004. So purely from a global perspective, we do not see a Fed rate hike having a major impact on Indian corporates. Having said that, intent and requirement are two different things altogether. Does India need to go offshore to borrow? Maybe not since, as correctly pointed out by my colleagues here, there is ample liquidity to take care of the first tier of growth, which is just kicking in. But the key problem I have is the issue of intent. It is the right time for the government to explore active shifts in terms of the internationalisation of the market. Masala bonds are a good start. But they should work more in terms of creating a sovereign

David RasquinhaExport-Import Bank of IndiaDavid Rasquinha is deputy managing director at Export-Import Bank of India responsible for project exports, trade finance, lines of credit, treasury and risk management. He has held a range of positions since joining the bank in 1985, serving as the bank’s resident representative in Washington, DC from 1999 to 2004. Rasquinha has also served on several working groups set up by the Reserve Bank of India. Anjan GhoshICRAAnjan Ghosh is chief ratings officer at ICRA Ltd. He is responsible for ratings in the corporate and infrastructure sector, covering both bank loan ratings as well as debt ratings. He has also served on deputation at the London office of Moody’s Investors Service. Before joining ICRA, he worked at Tata Steel. Philippe AhouaIFCPhilippe Ahoua is head of treasury client solutions for the Asia Pacific region at the International Finance Corporation, the private-sector lending arm of the World Bank. He joined the IFC in 1995 in the treasury department, and earlier worked at Bank of America in Washington DC and ED&F Mann Group in London. He is based in Singapore. Vikas HalanMoody’s Investors ServiceVikas Halan is senior credit officer for the corporate finance group of Moody’s Investors Service in Asia. Based in Singapore, he specialises in analyzing South and Southeast Asian corporates in the oil & gas, resources and transportation industries. Before joining Moody’s, he worked for JP Morgan in Hong Kong as a capital markets and ratings advisor for APAC clients. Sanjay GuglaniSilverdale CapitalSanjay Guglani is CEO of fund management company Silverdale Capital. In a varied career, he has been instrumental in creating offshore equity and credit derivatives markets for mid-cap Indian corporates, and started his entrepreneurial career as the founder of Saksham Group in India, one of the country’s largest proprietary/managed accounts fund managers. Earlier, Guglani helped set up capital market ventures for GE Capital and managed one of the largest cash-futures arbitrage books in India. Nipa ShethTrust GroupNipa Sheth is the founding director of Trust Group. Under her leadership, Trust Group has grown from being a distribution house of debt products in 2001 to a fully fledged investment bank providing services across origination, intermediation, advisory and fund management and distribution. Manju DalalIFR, Moderator Keith MullinEditor-at-Large, IFRRoundtable Editor To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com

Using Thomson Reuters proprietary data, we looked at all borrowing in the database by entities whose ultimate parent company was Indian and which had raised finance between January 2014 and June 2015 in the domestic and offshore bond and syndicated loan markets. The results, which were gathered during the third and early fourth quarters of 2015, were illuminating. Broadly speaking around 200 borrowers tapped the loan market and slightly more (225) accessed the bond market, with some (relatively limited) crossover. Total borrowing in dollar-equivalent terms across all markets was close to US$180bn. Not surprisingly, the bond market saw a lot more serial issuance than the loan market, particularly in the rupee sector. The local market offered good funding to India’s Triple A statist corporates as well as to borrowers in the housing finance, real estate, power and infrastructure sectors. India’s large industrial groups borrowed through a veritable forest of group subsidiaries and offshoots, while there was also a number of one-off special purpose entities (some regional state-linked) tapping the market for specific purposes, mainly for project and infrastructure finance. All-in-all, we estimated the true universe of entities to be around (but probably fewer than) 200 companies, with many of those with modest funding requirements coming to the market just one or two times in our sample period. With a healthy 20% response rate to the confidential survey, questions focused on borrowers’ intentions in terms of transferring between loan and bond markets and between offshore and onshore markets & on willingness to diversify sources of funding, and on key areas of concern. The Singapore roundtable event presented a summary of the survey findings followed by a spirited discussion with a panel of experts from the sell-side, buy-side, and issuer and ratings sectors. With the US Federal Reserve having tightened in December and the Reserve Bank of India having loosened monetary policy with a 50bp rate cut in September, the scene was set for some interesting dynamics in the capital and bank markets. The broad consensus from the conversation was that the domestic market would need to do a lot of the heavy lifting. But even when the domestic growth and capex cycle kicks in and sluggish credit demand picks up, there will be sufficient rupee liquidity in the local market (given growth in deposits above advances) to take up the slack. This is particularly true, given the preparedness of some borrowers to refinance bank facilities or raise capital for new projects in the bond market, and the parallel preparedness of the banks to extend credit in a rate down cycle that will hold out the prospects of better spread levels. At the time of the discussion, Masala bonds had been front-of-mind globally as a potentially exciting theme for 2016. But IFR’s Singapore panel very expertly threw out a lot of caution around this market and espoused a broadly unenthusiastic view, which turned out to be spot on. To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com