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Bankers said the reason for foreign investors pouring billions of dollars not only in Indian equities but in debt was fairly simple. The combination of a stable political regime and a strong Reserve Bank of India has pushed down credit spreads — the yield differential between dollar bonds issued by Indian companies and the five-year US Treasury. The lower the yield differential, the cheaper it is for issuers of bonds.
Indian companies, big and small, are capitalising on this opportunity to lock in investors at lower coupon rates. Even as the US Federal Reserve is unwinding its massive stimulus programme, the rotation from US bonds into equities has not happened. Contrary to this, high-yield foreign-currency debt issuances by sub-investment grade Indian companies are being lapped up by foreign investors. Morgan Stanley expects India to become the second-largest G3 (foreign currency) bond issuer in Asia, reaching the $160-billion mark by 2018, driven by non-financials in asset-class terms. Companies are increasingly going to rely on foreign debt for growth, believe experts.
Bankers said many small companies were accessing the foreign currency bond markets for the first time, with credit spreads declining sharply for Indian issuers. For example, companies like Greenko, Global Cloud Xchange and Rolta are in the process of issuing foreign-currency bonds. While Greenko is a clean-energy company, Global Cloud Xchange, formerly known as Reliance Globalcom, is a Reliance group company offering managed services and internet solutions.
Randhir Singh, managing director & India head (financing), Deutsche Bank, says: “Credit spreads for large Indian investment-grade issuers have come down by an average 50 basis points since the beginning of 2014. With a decline in credit spreads and withholding tax reduction, we expect a lot of sub-investment-grade issuance in coming months.”
Deutsche Bank is the lead manager to the three issuances — all maiden — by Global Cloud Xchange ($350 million), Greenko ($500 million) and Tata Steel ($1.5 billion).
At the start of the year, foreign bond issuances were slow, but these have picked up in the past few months to hit a record $12.3 billion so far this year; that is 11 per cent higher than in the comparable period last year. According to Kaustubh Kulkarni, managing director & head (debt capital markets), South Asia, Standard Chartered Bank, “this year has been particularly noteworthy in terms of the large issuance size of Indian issuers and also a diverse set of inaugural issuers tapping the market”.
Tighter credit spreads are a big factor in this rush for foreign-currency bond issuances. The Markit iTraxx Asia ex-Japan Investment Grade index, an important barometer for US dollar investment-grade credit spreads in Asia, is currently at a low of 104 basis points, down from a high of 150 basis points in January 2014 and 125 basis points in April 2014. In addition to tighter credit spreads, the move to lower withholding tax to five per cent from 20 per cent has also made it competitive for Indian companies to raise foreign-currency bonds. The low coupon rate is driving not just the big boys offshore but sub-investment-grade companies as well.
Citi India, too, has been in the news lately, as it has managed several big bond deals in 2014, such as ONGC’s jumbo $2.2-billion bond across dollar and euro, Tata Motors’ inaugural $300-million bond, Oil India’s inaugural $1-billion bond and Rolta India’s inaugural $300-million high-yield bond.
Explaining the trend of mid-sized companies accessing the foreign bond markets, Neville Fernandes, head of debt capital markets, Citi India, says: “The compression in credit spreads and all-in yields has contributed to several new companies taking advantage of the attractive funding levels offered by the bond markets abroad. We recently executed a very successful dollar bond issue for Rolta, which raised $300 million and the order book was oversubscribed around eight times, with marquee global funds participating in size. There are several other Indian mid-sized companies looking to access the bond markets abroad.”
Foreign investors, too, are interested in such high-yield issuances. With credit spreads tightening sharply for investment-grade companies, yields or coupons have declined sharply for the investment-grade issuers. Citi’s Fernandes says: “As a result, the search for a higher yield has pushed investors to go further down the ratings spectrum, to meet their absolute return targets. Global appetite for US dollar fixed-income products remains very strong, propelled by abundant liquidity, thanks to the ongoing monetary easing from global central banks. Credit markets have seen a shift from the fears of a tapering in the US Federal Reserve’s monthly bond-buying programme in the second half of 2013 to frenzied buying in the first half of 2014. Concerns around the switch of global fund flows from debt to equity have been unfounded, and demand for dollar debt products have only grown stronger.”
Stanchart’s Kulkarni believes the fund flows in high-yield bond funds has been robust. “The Asian Corporate HY (high-yield) index has declined since the start of the year on the back of optimism in the HY space. Given the strong general election mandate, there has been a further positive sentiment around Indian issuers, resulting in a spate of issuers considering foreign currency bond market,” he adds.
