First it was syndicated loans that marked a turnaround in perception toward corporate India, followed by bonds and then equity-linked sector liberalisation heralded the charge in convertible bond issuance.
It was just over two years ago that the international commercial banking community became aware of the value in lending to Indian banks and corporates. Credit spreads and loan pricing were collapsing throughout Asia and so India’s positive ratings outlook – if sub-investment grade – and a relatively healthy return from lending were enough to start the financing frenzy.
Banks have been falling over themselves to lend into this trend ever since, with the result that many outstanding loans taken out a couple of years ago have been refinanced on a regular basis at constantly reduced prices. As an indication of how extreme the competition has become to lend to India, UTI Bank was in the market in August with a deal that included a one-year tranche paying a margin of just Libor plus 17bp. That’s not bad for a credit that still resides below the investment grade cut-off point.
Bond issuance had a bumper year in 2004 with Indian banks leading the way to borrow in the dollar market. There was relatively little from corporate India, but that characteristic should change in coming months as the number of Indian companies internationalise. That will suit investors, who continue to seek out yield pick-up.
Most borrowers will stay at home, however, and contribute to what is already a huge domestic market.
For convertible bonds, it is less than two years since the market opened up and Blue Chip India began printing the first deals. Yet just as volumes have increased since then, the quality and size (in terms of market cap) of the issuers has decreased.
An element of caution is being structured into these latest deals, as revealed by the rising demand for asset swap protection, but there is still no legitimate way of adequately shorting the equity.
Indeed a lack of clarity surrounds much of the regulatory environment for hedging instruments, and derivatives in general. It is a concern, shared by at least one major bank this year that ran foul of the authorities in the equity market.
India is seen as a key engine of growth for Asia and, as with China, bankers view it as a land of massive potential in terms of business and profit. Whether this potential will be realised soon will partly be determined by the speed and extent to which regulators reform capital markets.
Gauging the pace of this liberalisation is a difficult call particularly given the country’s traditional affection for red tape. As things stand, dealing with India will remain more of an art than a science, and probably for some time yet.