India’s Oil and Natural Gas Corporation (ONGC) Videsh will issue its planned debut dollar bond, as confusion over the country’s new withholding tax regulations looks set to be finally cleared up. This in turn will open the pipeline to many more offshore corporate deals.
The wholly owned subsidiary of state-owned ONGC is expected to price a bond worth US$850 million on April 29. It is marketing five-year and a ten-year tranches with pricing guidance at Treasuries (T) +200 basis points (bp) and T+230bp respectively, according to a banker with knowledge of the deal.
The company initially planned to issue its dollar bond in January but confusion over tax rules has led many potential issuers to delay their pipeline dollar bonds.
The confusion stems from last September when the Ministry of Finance (MoF) cut the withholding tax rate from 20% to 5% for dollar-denominated bonds issued the infrastructure sector. The aim of this was to make dollar issuance more attractive and commentators expected that the pipeline would take off.
However, shortly after the change, it was discovered that section 206AA of the Tax Act was still valid. This states that in order for an issuer to benefit from the lower withholding tax it must provide the tax agency with the PAN (permanent account number) details of every bondholder in both the primary and the secondary markets.
Since then, there has been little offshore infrastructure bond issuance due to confusion over whether or not companies would have to pay the full 20% in withholding tax. But then on April 3, state owned company NTPC Limited made the first payment on its US$500 million 10-year Reg S only bonds issued in September last year, with only 5% withholding tax.
The company managed to circumvent rule 206AA by giving the PAN details of the bond trustee – in this instance an entity that is a part of Citigroup – according to a Reuters article earlier this month. According to the article, NTPC did this at the suggestion of the MoF suggesting the finance ministry would consider allowing other companies to do the same. According to commentators, this has given ONGC the necessary incentive to come to the market.
“NTPC made the payment at 5% and effectively that put an end to all of the speculation. I don’t think there should be any problem for other state-owned enterprises. The model has worked once so there is no reason why it cannot be duplicated by ONGC,” said one Mumbai-based head of DCM.
Demand and supply
The pipeline for USD-denominated Indian names is growing stronger, he said, and many companies hope to come to market within the next few weeks. This is due to more clarity on tax and the fact that pricing is becoming increasingly favourable for infrastructure and power names.
This can be seen by looking at Power Grid, which priced a US$500 million debut issue on January 11 with a coupon of 3.875%, the tightest ever spread for a 10-year deal from an Indian borrower in the international markets, at 210bp over USTs. It was tighter than NTPC’s September deal of the same size and tenor, which came out at 305 basis points (bp) over Treasuries. Guidance for ONGC’s ten-year tranche is T+230, but bankers say demand is robust and pricing could well tighten further. All three bonds are state-owned and are rated ‘BBB-‘ by S&P.
Aside from NTPC, ONGC and Power Grid, the state-owned investment grade companies in the utility, energy and construction sectors that are particularly active in the onshore bond market include Damodar Valley Corp., Nuclear Power Corp. of India, National Highways Authority of India and GAIL India (formerly Gas Authority of India Limited), according to Dealogic. As of yet none of these companies have issued offshore.
However, according to commentators there are only a few names that would be able to generate sufficient international demand for a longer tenor deal.
“Infrastructure and utilities companies would have to issue at least a 10-year bond, but it’s difficult to raise long-term monies for many companies. There are not too many of them who are globally known with sufficient financial strength to find success,” said the head of DCM.
A further concern is that while state-owned names have been and will be able to avoid the tax rule, the pipeline is unlikely to strengthen to full capacity until the market and authorities can agree upon a standard rule and put corporate treasurers fully at ease.
“The agencies are trying to come up with a mechanism to resolving this thing. I think it should be determined pretty soon and then we will see a much healthier pipeline,” said one head of South Asia DCM.
ONGC’s bond is rated ‘BBB-‘ by Standard & Poor’s and ‘Baa2’ by Moody’s. Bookrunners on the deal are Citigroup, Deutsche Bank and Royal Bank of Scotland (RBS). The company met investors in Asia and Europe for the Reg S deal from April 24.
The proceeds will be used to refinance bridge loans for the acquisition of oil and gas assets in Azerbaijan, according to Moody’s.