India's plan to sell $10-bn yen debt has one more hurdle: It's too much

Advocates of India’s first global bond offering are set to face another obstacle: there may not be enough appetite for $10 billion of yen-denominated debt.

The nation’s planned sale has been marked by controversy even before it gets off the ground, as reports surface of opposition from the prime minister’s office and the departure of an official handling the issuance. The government is said to be considering raising $10 billion at one go as early as October, with the yen and euro marked as preferred currencies.

The plan, if it does go ahead, may need to be revised, according to Kenichi Kurahashi, a Tokyo-based chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. 
 

A yen issuance that size would be equal to half the record 2.25 trillion yen ($20.7 billion) of Samurai bonds sold worldwide last year, and this may be too much for Japanese investors to stomach.

"Investors will mostly be concerned whether they will be liquid," said Kurahashi, who oversees 93 billion yen, including an Indian debt fund. "It may be more natural for them to issue in smaller amounts over a certain time frame to make them more familiar to Japanese investors."

Prime Minister Narendra Modi’s office would favor selling rupee-denominated bonds abroad instead, according to a report on Thursday by ET Now television channel citing Cogencis news agency. Several former central bank officials have criticised the plan, arguing that India isn’t ready for an overseas sale given its large budget deficit.

Still, emerging-market investors may welcome the proposal as they seek to boost returns amid declining global yields. A yen bond offering would place India alongside Mexico, Malaysia and Indonesia which have all have tapped the Samurai debt market this year to lock in cheap funding costs and lure yield-hungry Japanese investors.

Join the Crowd

Samurai issuance has reached 1.21 trillion yen so far this year, and the Philippines is also in line to offer as much as $1 billion of such securities.

"It will depend on the terms and yields levels of the issuance but they could draw interest from retail investors, mutual funds and may attract interest from institutions and financial firms," said Shigeki Sakaki, chief strategist at Nomura Asset Management Co. in Tokyo.

Japanese institutional investors tend to buy bonds with credit ratings of at least single A due to risk aversion but a search for yield may persuade them to accept lower-rated debt, Sakaki said. Domestic funds bought 1 trillion yen of foreign debt last week, an eighth week of purchases, as Japanese yields continue to decline.

India is rated BBB- by S&P Global Ratings and Fitch Ratings, one notch above junk. Moody’s Investors Service ranks the country Baa2, two levels above non-investment grade.

"We don’t see much political risks after the general election, although the country’s fiscal condition is not good,” Sakaki said. "In the current situation where investors know that they can’t raise returns by buying bonds of the single A grade, which many are requiring, there are more investors considering to take more credit risks by looking into the triple B area."