NTPC completed India's first corporate bond of the year on Monday, one day ahead of a 5% government-divestment in the country's largest power generator.
A $500 million bond deal and a potential $730 million equity offering have come just days before the country's annual budget on February 29.
This will determine whether the government plans to slow down fiscal consolidation in order to pump prime more growth.
If investors respond favourably to the budget, both the debt and equity deals may gain a positive following wind given NTPC's majority government-ownership and its status as a GDP proxy - producing almost a quarter of the country's power.
Where the bond deal was concerned, NTPC has also benefited from rarity value since there have been no offshore benchmark bonds from India this year and no offshore corporate deals since Reliance Industries came to the market last August.
This enabled the Baa3/BBB-/BBB- rated credit to build a respectable order book of $1.9 billion by the time initial price guidance was revised from 275bp over Treasuries to between 255bp and 260bp over.
The final order book closed at the $1.1 billion level with participation from 112 accounts.
Final pricing for the 10-year Reg S deal was fixed at 99.469% on a coupon of 4.25% and yield of 4.316% equating to 255bp over Treasuries.
By geography 68% went to Asia, 31% to Europe and 1% to offshore US. By investor type 57% went to funds, 22% to insurers and pension funds, 10% to banks, 7% to central banks and 4% to private banking clients.
Syndicate bankers and other fixed-income analysts concurred that NTPC paid a 5bp new issue premium based on fair value around 250bp over Treasuries.
The nearest comparable is NTPC's outstanding $500 million 4.375% November 2024 bond. This opened Asian trading at 225bp to 230bp over on a G-spread basis on Monday according to different brokers' prices. By the time the new deal priced, it had widened to between 235bp and 240bp on a G-spread basis.
Bankers said the Treasury curve between November 2024 and February 2025 is worth about 5bp. The credit curve is worth no more than a further 10bp based on the 18bp differential between NTPC's 2022 and 2024 bonds.
"I think this deal was timed quite well," said one syndicate banker. "The market was a bit soft on Friday, with oil prices falling and the US stock market weak. But spreads were stable when we opened in Asia on Monday so we decided to take advantage of that."
The banker added that there were many repeat investors in the book who had participated in NTPC's deal in November 2014 deal, which priced at 99.711%.
NTPC outperforms peers
Their presence was probably the result of NTPC's stable trading performance since then. The November 2024 deal has traded consistently well relative to the rest of the Indian corporate credit universe, which is dominated by oil-related names.
The bond only very briefly dipped below its issue price last summer and has been on a gently rising trend since November. Syndicate bankers agreed that investors' enthusiasm was also more credit and sector related rather than country specific.
By contrast, the only other recent quasi-sovereign credit from India has never traded above issue price.
Bharat Petroleum raised $500 million in May 2015. This 4% May 2025 deal is currently trading around the 96.69% level, below its 99.105% issue price on a yield of 4.4%.
Commenting on NTPC's new deal, Mizuho desk analyst Mark Reade said that, while he is not sure volatility is behind us, there is a scarcity of investment grade bonds from Asia yielding more than 4%.
As it is, the new deal marks NTPC's lowest coupon on record in the offshore markets. According to S&P Global Market Intelligence, the company has $1.8 billion in dollar-denominated debt outstanding, with a $300 million 5.875% note due to mature in early March.
In a recent rating release Fitch noted that the group's net leverage has jumped markedly from 2.97 times at the end of 2014 to 4.3 times in 2015 because of its heavy capex programme. However, it said this is balanced by its stable operating cash flows and favourable regulatory framework, which means it has power purchase agreements in place that pass through its fixed costs and fuel costs.
Standard & Poor's also recently commented on corporate India's deteriorating credit profile. In January it said that "economic conditions in Indian remain lacklustre despite several government measures to boost investments in the economy. Companies still face anaemic demand and lower capacity utilization."
Analyst Mehul Sukkawala concluded that “many rated companies have undertaken significant debt-funded investments over the last five years. They are at their peak debt levels, limiting the scope for positive rating actions."
Government boosts its coffers
The government, meanwhile, is ploughing ahead with plans to raise up to $730 million from the sale of a 5% stake in NTPC. It currently owns 74.96%.
The divestment will be the first to take place under new revised offer for sale guidelines and will be spread over two days. Institutional bidders will place orders on Tuesday and retail investors on Wednesday.
The offering’s floor price has been set at Rs122, 3.82% below the stock's Rs126.85 close on Monday. It ended the day 2.05% lower and is down 13.16% year-to-date, underperforming the BSE Sensex index, which is down 8.92% over the same period.
So far this year, the government has raised $1.9 billion from its divestment programme, well below a targeted $10.1 billion. This is not the first time the government has failed to meet its own target and ICCI Securities said on Monday that the government may set a more realistic target of $5.8 billion goal in the forthcoming budget.
In a research report, the bank also said that "meeting the fiscal deficit target for FY17 is going to be a tightrope walk for the government. It faces a trade off between boosting consumption through wage and pension hikes and boosting capital expenditure."
ICICI Securities has a buy rating on NTPC, recently revising its target price from Rs147 to Rs150. This is based on a valuation of 12 times 2017 earnings per share.
Joint global co-ordinators for the bond deal were: Barclays, Citi, Deutsche Bank, HSBC and SBI Capital Markets.
This article has been amended since first publication with distribution statistics.
