Bankers vent at RBI ban on bank-guaranteed bonds
Bankers in India were bewildered by a May 29 announcement from the Reserve Bank of India (RBI) that seeks to kill off the emergence of an embryonic market for corporate bonds guaranteed by banks.
Critics of the decision argue that bank-guaranteed bonds are essential to the development of the domestic bond markets, and they allow companies with lower ratings to access funding, especially in these times of restricted liquidity.
The RBI said banks should not guarantee bonds or debt instruments of any kind, and that allowing such a practice could have “significant systemic implications and impede the development of a genuine corporate debt market”.
The regulator did not elaborate on the threat posed by such securities on the market.
The decision came just eight days after Tata Motors successfully used a bank guaranteed bond to refinance a US$3bn 12-month acquisition bridge.
The automaker raised Rs42bn (US$886m) through a multi-tranche rupee bond that came bundled with a credit enhancement in the form of a standby letter of credit from the State Bank of India (SBI).
“We have no idea why this structure is such a concern for the RBI because it does not impede the development of the bond market but helps corporates rated AA and below to access the market,” said one banker.
“If a bank can go ahead and take corporate risk via a loan, why it cannot guarantee and take the risk of a bond is beyond my understanding,” the banker added.
“Guarantees and other structured mechanisms for increasing the bond rating are standard tools used worldwide and it is hard to understand how this would impede the development of corporate bond markets,” said another market participant.
“The guarantee mechanism bridges the loan and bond markets,” the market participant said.
Corporate bonds guaranteed by banks were common in markets such as mainland China, where such credit enhancements had been compulsory. However, regulators there are enforcing a policy U-turn and now prohibit such debt issues from receiving bank support.
Tata Motors certainly benefited from the SBI-guaranteed bond. The company raised much needed cash just ahead of a US$2bn refinancing of its bridge loan that funded the acquisition of Jaguar/Land Rover.
The deal was launched on May 20 and closed on May 21. Citigroup and Tata Capital were the lead arrangers on the bond, while SBI was joint lead.
The bond was split into four tranches: a Rs8bn 23-month tranche yielding 6.75%; a Rs3.5bn 47-month tranche yielding 8.4%; a Rs18bn 59-month tranche yielding 8.45% and a Rs12.5bn 83-month tranche yielding and marketed at 10.03%.
The pricing translated to spreads of 48bp, 90bp, 75bp and 173bp, respectively, over Triple A public sector credits.
By comparison, a rupee loan would have come at 12.5% at least. A rupee bond from the borrower, without a guarantee, would have been near impossible if not much more expensive than a loan, and would not have been as flexible as the structured bond.
The latest Tata Motors bond pays a 2% coupon plus a redemption premium. The weighted average yield-to-maturity is around 9%. Add another 1% in terms of the cost of the SBLC guarantee, and Tata Motors achieved a cost of funding of around 10%.
“This structure suits a borrower as it minimises upfront expenses and allows them to lock in a fixed cost,” said one banker.
“Since bank lenders would not prefer a low coupon and would lend at floating rates linked to PLR [prime lending rate], this structure would be difficult to replicate in loan markets.”
Bankers said the structure worked for many issuers and there were at least another two deals structured around guarantees from local Indian banks waiting in the wings.
But the very popularity of the structure may have been the reason for the RBI to react in such a heavy-handed fashion.
“It is possible that the RBI views too much of such issuance activity as an threat to the system, but they could have chosen a middle path like placing limits on guarantees, and not just kill the product like this,” said one senior banker.