Offshore rupee financings are well known around the world as Masala bonds, but it was very nearly something different.
International Finance Corp opened the offshore rupee market in November 2013, introducing what would become a new funding source for corporate India three years down the line.
The name for the new instrument, however, proved a challenge. IFC received a petition from more than 2000 citizens, demanding offshore rupee bonds to be named “Yoga bonds”, according to Jingdong Hua, vice president and treasurer of IFC. “We were very impressed with the interest, but we nicknamed it ‘Masala’ because it is a true representation of India: spicy and colourful,” said Hua.
The approval process was relatively quick. Since IFC had a AAA international rating and credibility, India’s Finance Ministry and Reserve Bank of India welcomed the move as a vote of confidence in the currency following the “taper tantrum” of the summer.
“We got the approvals in couple of months to issue US$1bn initially, which was exhausted within six months. The government was swift in giving approval for another US$2bn,” Hua said. The tough part was convincing investors since talk of an end to US quantitative easing had sent the rupee and other emerging market currencies into a tailspin. However, a nominal coupon of 7.8% on the three-year deal proved too good to resist.
The idea caught on at the highest levels. Years later, Prime Minister Narendra Modi even invoked it in front of a crowd of 60,000 people on a visit to London.
“We need development. That’s why after James Bond and Brooke Bond, we go to rupee bond,” Modi said.
Since its 2013 debut, IFC has raised a total of Rs140bn (US$2.2bn) from nine offshore rupee bonds with maturities ranging from three to 15 years, creating a yield curve to help Indian companies tap the overseas market. Progress in the corporate sector, however, has been slow.
“For two years, Indian companies were conscious of pricing and always comparing onshore and offshore yields,” said Hua. Housing Development Finance Corporation finally took the plunge in July last year, and was followed by a slew of private sector issuers. As the investor base has grown, offshore yields have dropped below onshore yields. NTPC’s five-year Masala issued in April this year was priced at 7.28%, 22bp lower than similar onshore benchmarks. “The market will reward those who take a courageous step and diversity funding sources,” said Hua.
The RBI took some of the spice out of the market this year with rules requiring a minimum original maturity of three years, rising to at least five years for deals over US50m, and coupon rates no more than 300bp over the government curve – effectively closing the market to lower-rated borrowers. However, Hua supports some guidelines to prevent risks from building up in the nascent asset class.
“I can understand the regulator would like to guide the market by developing a more restrictive guideline. It is not necessarily a bad thing,” he said.
Hua is hopeful that the Indian government or a state-owned proxy will create a yield curve, as China’s finance ministry has done in the Dum Sum market, and sees a role for Masala bonds in financing green projects. In August 2015, IFC issued the first Green Masala bond and used all the proceeds to invest in Yes Bank’s onshore Green notes.
While much of the recent interest in Masala bonds is down to the appreciation of the rupee, Hua is optimistic that eventually offshore rupee bonds will attract all kinds of investors, including long-term investors such as pension funds.
The Masala market is still very small, at US$5bn–$6bn, versus the US$100bn Chinese Dim Sum arena, and has the potential to develop given the growth momentum and size of Indian economy. As more Indian companies move away from banks and into the debt capital markets onshore, Hua believes it won’t be long before they come to the offshore rupee bond market, too.