Indian corporates beware: not everyone is a Tata
The Asian bond market got a rare slice of diversification away from Chinese credits recently, when Tata Motors issued a $750m dual trancher that was easily covered by a $4.5bn order book. It is certainly encouraging to see Indian corporates getting such a hot reception, but others will need to take a more calculated approach to offshore financing.
India’s bond issuers have a few things going for them at the moment, one of which is the positive sentiment that has surrounded the country since Narendra Modi’s pro-business Bharatiya Janata Party (BJP) came to power in May.
The second is the reduction of the withholding tax for newly-issued long term foreign currency bonds from 20% to 5%, a measure that has long been mooted and finally came into effect on October 1.
With Indian corporates missing from the debt market for nearly three months, Tata Motors deserves recognition for coming to the markets especially so quickly after the rule change.
The bond has helped put India back on the DCM map, with the huge order book a testament to the pent-up investor demand for Indian exposure.
But while Tata Motors bond was met with euphoria, Indian corporates still need to approach the market with a level head. Even though things are getting better, there are still plenty of obstacles.
Not the least of these is the fact that the Reserve Bank of India’s cap of six month Libor plus 500bp on all external commercial borrowings (ECBs) is still in place. This greatly hinders the ability of Indian corporates to pay up.
As a result, double B-rated Indian names can only manage to pay 5%-6%. Similar Indonesian names pay around 6%-7%. The premium is even larger when it comes to Chinese companies, which pay about 7%-8%.
The discrepancy did not matter much to Tata Motors, nor is it likely to hit Indiabulls and JSW, because those issuers are the best in class in their respective industries.
But what it does mean is that companies lower down the hierarchy will find it much more difficult to access the offshore debt market. They will not have the same reason to justify such a big difference in coupon.
The situation is not hopeless, though. Indian names have one big advantage, which is the diversification they bring. The Asian high yield bond market is so heavily skewed towards Chinese borrowers at the moment that any well-priced paper outside that jurisdiction should generally be well received.
But the trick will be for advisers to ensure some restraint in the number of borrowers that come offshore. If Indian corporates try to leap through the issuance window all at once, they could find it closes just as quickly as it opened.