India wants to make inroads into China’s dim sum market, with prospective borrowers attracted by the ability to get a bump up in credit ratings and sell bonds in moderate sizes at cheaper funding costs. Their hope is to partially sate the growing thirst for capital that is needed to develop the country’s infrastructure sector.
Export-Import Bank of India (Exim Bank) has signed an agreement with IL&FS Financial Services (IFIN) for a US$500 million credit facility to access the offshore renminbi market. Exim Bank will guarantee bond issues for IFIN’s clients, which are companies mainly involved in the infrastructure sector. The tie-up is expected to give Indian issuers a better credit rating in a market that has seen issue sizes comparably smaller than deals completed in the US dollar bond market.
“India infrastructure players are evaluating every possible channel, from loans to the international bond markets, to fund their capital needs. A US$500 million facility by Exim Bank is a small piece of India’s need for funding, but will be a meaningful step to put more issuers in place to obtain funding,” said David Greenbaum, head of debt origination for South Asia at Deutsche Bank. “The opportunity for a modest-sized company without an investment-grade profile to obtain a guarantee from a government-owned policy bank and tap the offshore bond market is very attractive for certain Indian companies.”
The ability for these companies to issue in smaller sizes is also another attraction to tap dim sum, according to Greenbaum.
“In typical sizes for US dollar deals, the market would expect an infrequent, first-time borrower to issue US$300-500 million, with conventional wisdom suggesting US$500 million in size for the first US dollar bond. In the renminbi market, the issuance sizes can be quite a bit smaller, which might be a more attractive bite size for some Indian companies.”
The facility will give an investment grade rating to such credits in the single-B range that are reasonably acceptable by Exim Bank or IFIN, said Manmohan Singh, head of DCM at RBS in Mumbai. India is rated ‘BBB-‘ by Standard & Poor’s and Fitch and ‘Baa3’ by Moody’s. However, the country is at risk of losing its investment-grade status, after Standard & Poor’s said slowing growth and a political gridlock were hurting its economy.
India desperately needs capital so it can add to or renovate its ramshackle infrastructure. The government has said it will have to scale back its US$1 trillion budget for infrastructure projects in the next five years because that target was set on the assumption that the economy would grow at 9%, according to press reports.
India’s growth rate is at a near-decade low 5.3% and the rupee is the worst-performing currency against its Asian peers against the dollar this year. Moody’s Analytics, a unit of Moody’s Investors Service, cut India’s 2012 GDP estimate to 5.5%.
Only three Indian issuers have tapped the offshore renminbi market this year. ICICI Bank issued Rmb210 million (US$33 million) in February and Rmb100 million in May at 4.7% and 4.8% respectively at 3-year maturities. Meanwhile, IL&FS Transportation Networks, which together with IFIN are subsidiaries of Infrastructure Leasing & Financial Services, issued a Rmb630 million bond in April, according to Dealogic.
Exim Bank guaranteed the latter deal, which resulted in savings in funding costs, according to Deutsche Bank, one of the bookrunners.
"Chances are, an issuer could see substantial savings if they were to borrow with an Exim Bank guarantee, even factoring in a guarantee fee charge,” said Greenbaum.
Swapping the renminbi to rupee would also prove to be more attractive than directly borrowing from the bank, according to a Mumbai-based debt capital markets banker, but added that more specific terms need to be seen before assessing the profitability of such an agreement.
“If an infrastructure company wants to borrow through the dim sum market, they would probably end up paying about a rate of 12.5% for a five-year maturity. That compares with rates at an Indian bank, which will be close to 13% and over. That is a 50-basis point discount,” said the banker. “But nobody knows how the process will work and how much Exim Bank will charge for the guarantee.”
Apart from the possibility of saving funding costs, Indian credits have been welcomed by foreign investors and are trading at tighter ranges in the secondary market. State Bank of India and Exim Bank issued US dollar bonds in the past month, with SBI’s 2017 issue trading at 335bp over US Treasuries compared to their reoffer spread of 375bp. Exim Bank's bonds were trading at 325bp, compared to their 355bp reoffer, according to a Singapore-based trader.
Coupled with an investment grade rating, issuers tapping the dim sum market may reap the sort of benefits experienced by companies with better credit ratings. About US$8.9 billion worth of bonds have been issued in the dim sum market so far this year, according to Dealogic.
“There is good liquidity in the market at the moment. The dim sum market offers issuers the chance to get additional PR and attract a new investor base,” said James Fielder, head of local currency debt capital markets at HSBC in Hong Kong. “We’ve seen a huge amount of issuance despite the fact that it is a little more costly to issue here versus USD. It may offer the chance to gain more publicity around the trade for companies looking for that benefit.”
Steve Wang, head of fixed income research at BOCI in Hong Kong, agrees: “Indian companies have been active in the US dollar bond market and will remain so in the future. The dim sum bond market offers a new alternative fundraising channel, and Exim Bank may also have a natural need to support renminbi business for the Indian companies doing business with China. We expect to see more Indian companies to participate in this market, following the same pattern of the rest the Asia or non-Asia issuers.”