Here come Indian hybrids — or do they?
Tata Power has re-opened India’s nascent domestic corporate hybrid bond market, bringing a deal that has doubled this year's volume in the sector at a single stroke. But bankers should not get too excited. There are reasons why there have been so few sizeable deals.
Tata Power priced a Rp15bn ($270.4m) 60 year hybrid bond at the end of last week. Callable after 10 years, it is the longest-dated domestic corporate bond, excluding perpetuals, ever sold in India. The deal found plenty of demand from investors. But Tata’s bond is not set to spark a trend, despite the evident advantages of hybrids to both investors and issuers.
Hybrid bonds offer issuers the convenience of not breaching debt-to-equity ratios agreed with creditors. They also avoid diluting shareholders, while still having equity-like characteristics.
But Indian borrowers are not that keen to issue hybrids for a number of reasons — not least the cost. Bankers reckon issuers have to pay at least 100bp more for hybrids than for senior bonds.
That means that companies in need of funding would rather issue senior bonds or turn to banks for loans — unless they are on the brink of breaching covenants or their credit ratings are under pressure.
Demand is never a problem. India’s provident funds, private banking clients and insurance companies are only too willing to add hybrids to their portfolios, given the juicy yields they pay out.
But India’s corporate hybrid bond market, as with the market in the rest of Asia, is still in its infancy. Asia’s hybrid market only sprang to life in September 2010, when Hong Kong conglomerate Cheung Kong Infrastructure sold the first deal, raising $1bn.
India’s domestic corporate hybrid market is even younger. It started only last year when Tata Steel, Tata Power’s sister company, issued Rp15bn of perpetuals that were mostly bought by ICICI Bank, a bookrunner on the deal alongside JP Morgan.
Indian issuers — corporates and financial institutions — have sold the equivalent of $292m of rupee hybrid bonds so far this year, 46% lower than the same period in 2011, according to Dealogic. That’s a paltry sum compared to the hybrid issuance in Singapore’s domestic bond market, which has surged to $3.634bn so far this year, exceeding the $705m recorded for the whole of 2011.
What's different about Singapore? The investor base is deeper, for a start, and there is more liquidity. The cost differential over senior is not so great for issuers.
But the city state's experience shows that there is clearly potential for hybrid bonds in Asia's domestic bond markets. In time, that potential might even be realised in India — but it will not be soon.