Cross-border bond issuance by Indian companies could boom in 2015 and beyond if the New Delhi government introduces economic reforms and market conditions steady.
Two key trends would support this, Standard & Poor’s said in a report on Tuesday: an increase in corporate foreign currency funding requirements due to higher capital spending and a shift in eligible foreign currency funding to international bond markets.
“With the economic reforms that are being brought in by the new government, there is potential for issuances to increase over the next few years,” Mehul Sukkawala, a corporate ratings analyst for Asia-Pacific at S&P, told FinanceAsia.
As a result, Indian annual cross-border debt issuance could test the $25 billion mark over the next few years, Sukkawala said.
External loans taken out by Indian commercial borrowers (where the minimum loan size is $150 million) have roughly averaged between $15 billion and $20 billion per year over the last few years, according to S&P. But some of this loan volume could now shift into the debt capital markets.
For Indian companies, 2014 was a record year in many respects for cross-border debt issuance. According to Dealogic data, more than $11.8 billion in bonds were issued against about $8.5 billion in 2013.
Some of the landmark transactions seen last year include Oil and Natural Gas’ $2.25 billion three-tranche bond, the largest Indian cross-border issue, and Tata Steel’s $1.5 billion notes, India's biggest ever high-yield debt issue.
Market participants attribute these record volumes to expectations that the new Narendra Modi government elected in May would follow through with reforms. The task ahead will be to turn this sentiment-driven growth into growth based on improved economic fundamentals.
Based on current trends, the prognosis is positive, say some fund managers.
“[The] Indian domestic bond market has just entered a bull market,” Ken Hu, chief investment officer for fixed income, Asia-Pacific at Invesco, said in a press briefing on January 9. “High yields, disinflation and inexpensive Indian rupee make the asset class attractive.”
Prime Minister Modi's victory last year triggered high expectations that the new government would push through a number of reforms that would boost the Indian economy, liberalise markets and attract foreign investment.
The International Monetary Fund is similarly optimistic. In its latest World Economic Outlook report it sees the Indian economic growth rate surpassing China's by 2016.
And on January 15, the Reserve Bank of India delivered a quarter-point cut in interest rates ahead of its February policy meeting, lowering it to 7.75%. In its accompanying statement, the RBI said inflationary pressures had been easing since July 2014 due to falling commodity prices and weak demand conditions.
Lingering uncertainties
Despite the widespread bullishness, it’s still too early to tell the scope, depth and timing of further Indian economic reforms, let alone the likely effect of these reforms on corporate Indian capital spending.
The cut in the withholding tax imposed on foreign currency bond issuance to 5% from 20%, which came into effect on October 1, is the most meaningful of the capital market reforms undertaken so far. Previously, only infrastructure companies were allowed to tap the bond market at the lower tax rate. The next phase of reform may yet relax some of the restrictions on lower-rated Indian credits. For bonds with tenors of five years or less, for example, total costs cannot exceed Libor plus 350 basis points.
“To a certain extent the reforms are still being implemented by the new government and we still need to see the benefit on the ground,” S&P’s Sukkawala said. “Also whilst the reforms are being implemented, it will take some time before you see companies enter their capital expenditure cycle, which could be a couple years away.”
The Indian government's Union Budget toward the end of February will provide more clarity about which reforms are on the agenda, although parliament will still have to pass the budget proposals before they go into effect.
Nonetheless, there are a few Indian corporate issuers already in the Asian pipeline that are raring to go (once current market volatility subsides).
Delhi International Airport completed investor meetings in Singapore, Hong Kong and London on January 16. It has mandated Citi, HSBC, JP Morgan and Standard Chartered for a potential Reg S dollar-denominated transaction.
Meanwhile, Religare Health Trust, a business trust sponsored by India-listed hospital operator Fortis Healthcare, is having investor meetings currently in Singapore for a potential Singapore-dollar denominated issuance. It has appointed DBS, Deutsche Bank, Religare Capital and Standard Chartered.
