When REI Agro planned to make its debut in the dollar bond market, the first talk on the street heralded this as the beginning of a gold rush into Indian high yield bonds.
Rated single-B, the basmati rice company would have been the lowest-rated issuer from India with its five year, non-call three bond.
To many, it made perfect sense for Indian high yield paper to hit the markets now. Credits like mobile telecoms group Bharti Airtel, rated BB+, have recently attracted a stampede of investors.
The Indian government’s rule that Indian issuers overseas cannot pay more than 500bp over the relevant Treasury benchmark makes it difficult for higher yielding companies to tap the international bond markets. But at a time when spreads are tight and investors are looking for diverse new credits, if bankers could just manage to squeeze such names through this narrow window, it could be a great sell.
Things are not that simple, however. During meetings with REI last week, one investor said he balked at the fact that the 12% yield guidance, which initially looked generous, was much tighter than the issuer’s convertible bond, trading around 25%.
REI’s total debt stands close to $1bn, getting on for five times its $212m market cap. Investors also questioned the company’s expansion into non-core areas such as renewable energy and agricultural product trading.
Another investor complained that the rate was too low, considering REI’s disclosures in its offering circular that: “We have failed to comply with certain provisions of a financing agreement which could result in a default of such agreement and trigger a cross-default in other facilities under notes under the indenture” and that “SEBI [the Securities and Exchange Board of India] has alleged that the preferential allotment of equity shares made by the company to various entities on 22 March 2005 was partly indirectly funded by the company and that such preferential allotment was made in a fraudulent manner thereby violating certain provisions of the company’s act...”
Investors also pushed back when Bombay-listed Ruchi Soya tried to issue a Singapore dollar bond last week.
In April the Times of India reported that income tax investigators had searched some Ruchi Soya offices.
But, from the market’s point of view, there is no reason to mourn the lack of a smooth sailing for these Indian high yielders.
Instead, bankers should heed the clear message from these deals. Indian companies wanting to issue high yield bonds overseas must be able to demonstrate strong corporate governance, focused business models and, overall, inspire rock-solid confidence among investors that they will be able to pay back their bonds.
A few false starts may be a necessary pain to digest, so that issuers know that bankers can’t perform miracles — only recommend realistic pricing expectations.
Investors may be yield-hungry, but thankfully they are not yet desperate, and want to carry out due diligence on issuers they are not familiar with.
Future issuers, even with unimpeachable track records, may need to drum up support by paying up and strengthening their covenants.
What India’s high yield market needs next is some better-rated deals to prove to global investors that they can find attractive companies to invest in India.