Companies may raise $5 bn via masala bonds over 3 years: S&P

Says success of the new instrument will depend on competitive pricing and attractive returns

Indian companies could raise up to $5 billion over the next three years through issue of offshore rupee or masala bonds, but success of the new instrument will depend on competitive pricing and attractive returns, a report said today.

In the report titled 'The Success Of Masala Bonds Will Depend On Satisfying International Investors' Palate', Standard & Poor's Ratings Services (S&P) said masala bond issuers will seek competitive pricing and funding diversification, while investors will pursue adequate returns that factor in their estimates of currency risk.

"Uncertainty about liquidity, availability of the existing option to invest in onshore rupee bonds, and currency risk could subdue investor demand. Masala bond issuances have the potential to reach $5 billion over the next two to three years if they overcome these challenges," it said.

The nascent market for rupee-denominated offshore bonds, colloquially called masala bonds, holds good promise for diversifying the funding for Indian issuers, S&P noted.

"We expect government-owned entities, finance companies, and corporate entities in stable, domestic-focused sectors such as utilities to lead the process for gauging investor interest in masala bonds," S&P credit analyst Abhishek Dangra said.

In September, RBI had allowed non-banking finance companies (NBFCs) and other corporates to issue masala bonds to deepen capital markets and provide these issuers with a way to raise funds abroad without incurring currency risk.

Masala bond is used to refer to an instrument through which Indian companies can raise overseas funds in rupees, not foreign currency.

HDFC Ltd, the largest mortgage lender, has already announced its plans to sell up to $750 million of rupee bonds overseas.

"Issuer creditworthiness, India's economic growth trend, and investors' view of currency risk will all play equally important parts in the growth of masala bonds, given the medium-to-long-term tenor of these instruments," S&P said.

The report notes that issuers that use masala bonds can benefit from diversification of their long-tenor funding, wider use of proceeds, and shifting of the currency risk to investors.

Investors will also benefit from a simpler funding structure, absence of a hard price ceiling, and exemption from capital gains tax on rupee appreciation.

Masala bonds will allow more financial companies, including housing companies, to be eligible to borrow because the central bank has allowed a wider use of the proceeds.

"It is possible that the Indian sovereign may consider issuing masala bonds in the future," S&P credit analyst Kyran Curry said.