India’s government is loosening rules on credit enhancements on rupee bonds to stimulate issuance by local businesses, which are struggling to access funding as banks become more stringent and cautious in their lending practices amid a slowing economy and rising default rates.
Until now, foreign entities were only allowed to guarantee rupee bonds issued by infrastructure companies as a way to boost investment flows into the troubled sector. But the government is now widening the facility to all Indian companies, according to the Wall Street Journal, while shortening the minimum maturity of such bonds to three years from seven. The facility is set to provide cheaper funding to these companies compared with banks.
“A double-‘A’ rated company will have to pay 10% for a one-year bank loan denominated in rupees, and that’s quite high given the fact that the repo rate is 8%. Conditions are still tight and banks will not want to lend at a lower rate,” said Kumar Rachapudi, South Asia strategist at Barclays. “Given this, plus a weakening currency outlook, there is an argument for the government to loosen more of these restrictions, so this is definitely a positive.”
India’s banks have come under pressure to reduce lending rates after the central bank cut the policy repo rate in April to bring down the level of deposit rates. Finance Minister Palaniappan Chidambaram last week urged state-owned banks to boost lending to manufacturers.
This credit enhancement facility will certainly open doors to more Indian companies to tap the market, according to a Hong Kong-based debt syndicate banker. Investor appetite is quite limited for lower-rated credits, but interest will be higher for bonds that are backed by a solid entity.
“The market for unfamiliar and low-rated credits still remains to be seen. But if you have these same issues credit-enhanced by guarantees from a well-known bank, the credit concerns can then be mitigated and replaced by pricing considerations,” said Clifford Lee, head of debt capital markets at DBS Bank. “For selective names, a guarantee will be helpful because there are still good corporations that are still getting banked by commercial banks, but just not rated or well known to bond investors.”
Bankers have said that institutional investors were concerned about the Indian economy, as a widening current account deficit of 4.2% of US$67 billion and a record-low rupee of 57 against the dollar on June 21 fanned worries of investing in the country. But a strong response to Indian bank bond issuance in the US and Singaporean dollar market in the past few weeks has helped alleviate concerns, and is set to continue demand for local and foreign-currency bonds.
“Up till a few weeks ago, the market was uncertain as to how Indian bond deals will be received. But after the recent series of severely oversubscribed USD deals by Indian banks, including one in SGD by IDBI, it is now clear- the market is definitely still there for them,” said Lee.
State Bank of India tapped the US dollar bond market on July 31 with a five-year deal worth USD1.25 billion. Since then, a string of Indian banks have followed, including ICICI Bank, Export-Import Bank of India, Axis Bank and India Overseas Bank.
Many Indian credits are rated ‘BBB’ on the Indian national scale when investor demand is for double-‘A’, which equates to ‘BB+’ on an international rating scale. India is rated ‘Baa2’ by Moody’s and ‘BBB-‘ by Fitch and Standard & Poor’s.
But this facility does not mean that high-yield Indian issuers will line up to participate in the programme. A better credit rating may make rupee bond issues more appealing to domestic and foreign investors, but bankers say they will also have to be able to persuade investors that the business has a viable cash flow in order to garner investor interest in an Indian company that has been credit enhanced.
“I’m not sure this opens up necessarily a slew of opportunities for sub-investment grade or challenging credits, but it will help companies who have the ability to tap the market on their own rating basis,” said Rahul Chawla, Credit Suisse head of Global Markets Solutions Group in India. “This will give them a slightly better pricing arbitrage to tap the markets because typically the credit rating may not be able to be for the full amount of the bond, and they will be able to therefore save some costs on their credit-enhanced instrument and tap the market.”
“‘B’ credits get done but the issue here is apart from ratings, you need to make business cases. And it’s going to be a very hard one to make. That’s why you need to select names out there,” said another head of debt capital markets.
India has been establishing credit enhancement schemes to help increase fund flows into its infrastructure sector. Last week, Export-Import Bank of India (Exim Bank) 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.
Another scheme was launched in January by India Infrastructure Finance Company Limited (IIFCL) and financed by the Asian Development Bank, providing a type of bond insurance for senior debt linked to infrastructure projects.