Copying and distributing are prohibited without permission of the publisher.


There’s an end in sight for India’s CB jeebies

India flag resized 230px
By Rev Hui
27 May 2014

Following Narendra Modi’s landslide victory to become India’s next prime minister two weeks ago, the country’s benchmark Sensex and Nifty indexes have both soared to record highs, leading to plenty of chatter that a wave of new issuance may be unleashed. The talk mainly revolves around IPOs and share placements, but the conditions are also ripe for convertible bonds to make their long awaited comeback.

Talk about going from hero to zero. Back in 2009 Indian issuers accounted for one quarter of CB issuance in Asia ex Japan. Fast forward to 2013 and not a single deal priced.

The dearth of issuance is easy to explain. Interest rates are at an all-time low, thanks to quantitative easing. Many companies are taking advantage of that to issue straight debt instead.

And while both the Sensex and Nifty have performing quite well since 2012, rising 58% and 57%, respectively, investor appetite has also been severely hampered by several high profile defaults.

Wind turbine manufacturer Suzlon Energy was the most notable example, failing to meet $619m of CB obligations in 2012. And even though total defaults on CBs only stood at $241m in 2013, according to official statistics, that was still 22% of total redemptions due that year. 

It's fair to say that Indian convertible bonds have fallen out of favour.

That could now be set to change. Despite all the negativity, the stars are beginning to align for Indian issuers looking to tap the equity-linked market for funding. Rates are expected to rise, and stocks have shown that they can surge — they are trading at record highs. So long as everyone thinks they can go further still, the CB structure looks like a smart bet.

Issuers get to pay out relatively low coupons with a tidy premium over record share prices, while investors can enjoy the prospect of greater returns from the stock option with the safety of a bond-like product.

Investors' need for diversity could also bring buyers back to Indian names. Already this year Chinese issuers have raised a combined $4.86bn via international convertible bonds, representing 73% of the total volume in Asia. Last year that figure was 65.7% of deals, worth $14.74bn.

Hong Kong and Taiwan are the only other two active participants in the market, but they fall under the Greater China bracket and there is a limit to how much exposure investors can take to Chinese names — particularly when the majority of those are from the tech space. With so much concentration risk, Indian CBs start to look very appealing.

There is, inevitably, a regulatory hurdle. Indian companies are not allowed to issue debt with a tenor shorter than five years. Since the sweet spot for Asian CBs has always been the five put three structure, that's a problem.

Plenty of effort will be needed to persuade investors to plunge into an investment that exposes them to longer dated risk, and even with the current stock boom, that will not be easy given the historic performance of Indian markets.

But it is surely worth trying. For the first time in a long time there is a wave of political and reformist optimism in India, and a seemingly unstoppable momentum behind Modi. Indian borrowers and their advisers would be wise to jump on and enjoy the ride.

By Rev Hui
27 May 2014