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Convertible Bond Returns Beat Sensex, Other Debt: India Credit

Convertible Bond Returns Beat Sensex, Other Debt
Convertibles in India gained 18.4 percent this year through Oct. 21, the highest returns among eight Asian markets tracked by UBS AG. That compares with 16.3 percent for the Bombay Stock Exchange’s Sensitive Index. Photographer: Kuni Takahashi/Bloomberg

Indian convertible bonds, Asia’s best performers, are beating local stocks and corporate and government securities this year on rising speculation borrowers will repay debt as the economy accelerates.

Convertibles in India gained 18.4 percent this year through Oct. 21, the highest returns among eight Asian markets tracked by UBS AG. That compares with 16 percent for the Bombay Stock Exchange’s Sensitive Index and 3.7 percent for government bonds. U.S. convertible debt has returned 9.8 percent, according to Bank of America Merrill Lynch indexes.

“India is in a region with one of the highest growth rates, and money just keeps flowing in,” Stefan Meyer, a fund manager at Fisch Asset Management AG in Zurich, said in a telephone interview. The firm oversees more than $4.5 billion including convertible bonds of Larsen & Toubro Ltd. and JSW Steel Ltd. “India generally offers nice diversification in the convertible bond universe, and we don’t see any reason why this momentum will not sustain in the near future.”

Investors are betting faster growth will boost corporate profits and improve the credit outlook. Crisil Ltd., the Indian unit of Standard & Poor’s, raised ratings on a record 253 local companies in the six months ended Sept. 30, while Moody’s Investors Service lifted India’s local-currency ranking in July in the first upgrade since 1998. Earnings are set for a record annual gain, analyst estimates compiled by Bloomberg show.

‘Can Be Undervalued’

“We can find a lot of high-yield names in India offering 10 to 15 percent and it doesn’t always mean there are some credit problems with the companies,” Carter Cai, a convertible bond manager at Banyan Asset Management Ltd., said by phone from Hong Kong. “India convertible bonds tend to yield higher than those in other countries and they can just be undervalued.”

Tata Motors Ltd.’s 4 percent note maturing in October 2014 has handed investors a 56 percent return this year, according to prices at investment bank Elara Capital Plc. The Mumbai-based carmaker’s stock price jumped almost 50 percent to 1,186 rupees, almost double the debt conversion price.

India’s equity-linked debt has outperformed similar debt from China, Singapore, Malaysia, Taiwan, South Korea, the Philippines and Indonesia this year, and topped the 13.7 percent gain in the UBS Asia ex-Japan Convertible Index.

Sales Slow

“Convertible bonds are largely reflecting the broader features of the stock market,” Martin Haycock, London-based head of convertible bond marketing at UBS, said in an e-mail yesterday. He said Indian convertibles in UBS’s index are more sensitive to the underlying stocks than those in China.

Indian companies have sold $1.4 billion of foreign-currency equity-linked notes this year, compared with $3.9 billion in 2009, according to Bloomberg data. Issuance peaked at $7.5 billion in 2007.

“The market in India hasn’t been very active this year as most of the new issues are coming out from Hong Kong, China and South Korea,” said Banyan’s Cai, who manages about $20 million. “So there will be some demand as supply is going to diminish.”

Indian companies have about $9.1 billion of convertible bonds coming due between now and the end of 2012, according to data compiled by Bloomberg and Elara Capital, accounting for 72 percent of all outstanding foreign-currency convertible debt.

“About 70 to 75 percent of Indian companies have the cashflow, 20 to 25 percent have to sell assets, or raise equity, to repay their debt,” Mikhail Filimonov, a managing partner at Odyssey Investment Management LLC in New York, said in an e-mail on Oct. 23. The rest “will have to hope for the best,” he said.

Odyssey’s funds have returned about 30 percent this year. It owns debt including Geodesic Ltd. and Strides Arcolab Ltd.

Suzlon Yields

Suzlon Energy Ltd., India’s biggest wind-turbine maker, has $389 million of dollar bonds maturing within two years, Bloomberg data show. The yield on its zero-coupon note due June 2012 has surged to 22 percent from 15 percent at the start of the year, while its 7.5 percent note due October 2012 doubled to 19.5 percent, according to Elara Capital.

“Suzlon is not priced to fail, the yields just show high credit risk,” Alice Chikara, a Singapore-based analyst at Elara, said in an e-mail yesterday. “They are focusing on tidying up their balance sheet and this should increase its ability to refinance if the 2012 bonds are not converted.”

Suzlon announced plans on Oct. 12 to raise as much as 50 billion rupees ($1.1 billion) selling new stock locally or convertible bonds overseas to help fund an expansion and repay loans. Anoop Kayarat, a spokesman for Suzlon, declined to comment before the company reports earnings results later this month.

Growth Outlook

Profits for companies making up the Sensitive Index jumped 56 percent this year to 1,027 rupees a share and are poised for the biggest annual gain since Bloomberg started compiling the data in 2000. The measure may climb to 1,176 rupees in the next 12 months, estimates compiled by Bloomberg show.

Gross domestic product in India will climb 9.7 percent this year following a 5.7 percent increase in 2009, the International Monetary Fund forecast Oct. 6.

Corporate bonds have gained, with the extra yield investors demand to hold India’s top-rated company debt over government securities falling to 65 basis points from 86 basis points, or 0.86 percentage point, at the start of the year.

India’s rupee fell 0.3 percent to 44.46 per dollar today. It gained the most in a week yesterday after the nation’s finance minister, with counterparts in the Group of 20 nations, pledged to refrain from intervening in currencies. It has climbed 4.6 percent this year against the dollar and 8 percent against the euro.

India’s 10-year bonds fell, pushing yields to a two-year high. The yield on the 7.8 percent note due May 2020 was 8.15 percent, the highest among the major emerging economies except Brazil, where similar-maturity notes pay 11.59 percent. Comparable securities offer 7.34 percent in Russia, 3.29 percent in China and 2.55 percent in the U.S., Bloomberg data show.

The difference in yields between India’s securities due in a decade and U.S. Treasuries has widened 27 basis points this month to 560.

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