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India DCM: Time for a reality check

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By Rev Hui
23 Feb 2016

For years market participants have been talking about India’s potential in the international bond market but volumes have always disappointed. While this week’s return of National Thermal Power Corp (NTPC) to dollars have got enthusiasts talking once again, their excitement is likely to be short lived.

It is hard not to be positive on India given that it is one of the biggest countries in Asia and boasts an economy that is growing at a pace that ranks among the top in the world.

Indian credits also serve as an important diversification play for investors away from China, which is by far the largest issuing country of international bonds in Asia ex-Japan, accounting for roughly half of total volumes.

indepth_india_300pxYet, Indian bond issuance has never overwhelmed, with issuers in the country selling close to $8bn of G3 bonds in 2015. To put that into perspective, it is equal to just 5% of the region’s total volumes last year.

But the year has started well with NTPC selling a $500m bond on Monday, becoming the second Indian issuer this year following Export-Import Bank of India’s $500m deal in January. There are more positive signs too with fellow state-owned entity Hindustan Petroleum Corp getting a first time issuer rating from Moody’s recently.

Of course, we should also not forget Masala bonds, or offshore rupee bonds, which some debt bankers are calling the next dim sum market. India finalised a Masala bond framework last year and the hope is the first transaction from the country will come this year.

A number of firms have shown initial interest, with the UK’s economic secretary to the Treasury reportedly saying during a visit to India last week that there was huge potential for the Masala market in London.

But it’s time to take a sober view. Because despite all the positivity around the country’s debt capital markets, at the end of the day issuance is still mainly driven by one factor — pricing. And the price is simply not right for Indian firms.

For a five year maturity, a top rated Indian conglomerate is estimated to be able to save anywhere between 20bp-40bp by going to the dollar loan market or the country’s domestic bond market instead of selling a conventional dollar bond.

People can preach all they want about the importance of diversification of funding sources, but when faced with such price discrepancy, it is hard to imagine any issuer making the jump unless it is for a very specific reason. In NTPC’s case, it needed dollars with a 10 year tenor and it opted for a bond as liquidity tends to dry up in the loan market beyond five years.

It is the same story for Masala bonds with both issuers and investors locked in a battle over pricing. Issuers want to sell their offshore notes at similar levels to domestic bonds but investors are demanding a premium ranging anywhere from 50bp-200bp as compensation for a weakening rupee and a 5% withholding tax that they will be subjected to. Unless the gap narrows, it is hard to see Masala bonds being a particularly hot market without the government actively pushing out issuers.

And with capital expenditure needs low, any potential fundraising is expected to be driven mainly by refinancing. Even that is likely to be low as many Indian issuers pre-funded in 2014 and 2015.

Something’s got to give for international bonds to appeal. The cost of funding would first have to make sense and banks need to stop lending to issuers. Both are unlikely to happen given the country is in the midst of monetary loosening, not tightening, and borrowers are still flocking to the very liquid loan market.

Of course, this is not to say there will be no international bonds out of the country as there will be companies like NTPC that are in need of dollars and will come to the bond market. But will India be the next big thing in debt capital markets? Don’t get your hopes up. 

By Rev Hui
23 Feb 2016