India has an international rating of BBB-, a notch above junk.
ICICI Bank last week raised $300 million through 5.5-year bonds at equivalent maturity US treasury plus 155 basis points. The fixed rate coupon of the bond came at 3.25 per cent. India’s largest lender, State Bank of India (SBI), similarly, priced its bonds too at 3.25 per cent in January.
Axis Bank, through floating bonds, raised money at 2.135 per cent. State-owned NTPC Ltd raised money at 2.75 per cent.
These are superfine rates, considering they came from a country with a sovereign rating that is just above the speculative grade.
Consider these rates from well-known issuers in countries rated a few notches above India. Chinese companies and financial institutions regularly tap the market to raise bonds at 3.5 per cent plus. For example, China’s biggest conglomerate, CITIC Group, raised money at 3.875 per cent on February 28.
Germany’s Allianz SE raised money in September at 3.875 per cent, and Britain’s Prudential Plc at 5.25 per cent in July last year, around the same time BNP Paribas raised eight-year funds at 3.650 per cent, whereas drug major Pfizer Inc raised 30-year funds at an annual coupon of 4.20 per cent.
Of course, not all Indian companies are pricing their bonds as competitively. But the pricing is any way cheaper than what they would have raised in the domestic market. The pricing between companies also varied widely. For example, Shriram Transport Finance Co Ltd raised three-year money at 8.25 per cent, even as Adani Ports and Special Economic Zone raised five-year money at 3.95 per cent.
“In the global context, improvement in India’s macroeconomic parameters and higher growth prospects have reflected in increased demand for Indian credits,” said an ICICI Bank spokesperson.
“ICICI Bank, on the strength of its robust franchise and strong capital position, has been a regular issuer in the USD bond markets. Through well-timed issuances, the bank has been able to access foreign funding at very competitive rates,” the spokesperson said.
To be sure, rates could be structured in a manner that can effectively mask the rating of the firm. For example, by giving a higher discount to the face value, the effective coupon could be squeezed even further. In that case, taking the coupon won’t be a right measure.
In that case, the best gauge is to see the yield in the secondary market of the firm’s existing bonds.
ICICI Bank had issued a certain bond at a coupon of more than 6.5 per cent in 2007. The secondary market yield of that bond is now close to 3.8 per cent, which establishes that ICICI Bank paper is attractive. As yields fall, prices of bonds rise.
The same is the case with SBI bonds in the secondary market. Yields have fallen much below the coupon of these bonds.
This also indicates that international investors are now able to distinguish between good companies and bad, and are not very bothered about the country rating as long as their money is safe. This is something that rating agencies have to consider. Even as India lobbies hard with international rating agencies, the country rating has remained static for a very long time even as the agencies and other international investors continue to praise the economic resilience and fundamentals of the country.
Clearly, investors have moved ahead of rating agencies.
“Investors put their money in a company on a case-by-case basis. This is not unusual that a company with a lower-rated country gets very good rates because the underlying fundamentals of the company and the structure of the paper are good,” said Lillian Georgopoulou, fixed income product specialist at the London Stock Exchange.
Add to that, there is a new confidence in the Indian story.
“Investors now have confidence in both the country and the currency. The rupee in the past had been quite a volatile currency. With the credible government reforms of the Modi administration, investors have got the confidence to invest even longer-term in India,” she said in an interview with Business Standard earlier this week.