Dollar-denominated bonds sold by Indian companies handed investors the worst returns in 15 months in August and money managers said the debt will rally only once the global economy shows signs of recovery.
The notes lost 2.2 percent last month, the biggest decline since May 2010, when concern first arose that Greece’s debt crisis may spread to other European nations, indexes compiled by JPMorgan Chase & Co. show. Chinese corporate dollar debt fell 3.6 percent in the same period, while notes from Russia and Brazil slumped more than 1 percent, the indexes show.
International bond sales by Indian companies plunged 80 percent last month to $200 million from July, after a record first half helped fuel growth in Asia’s third-largest economy, according to data compiled by Bloomberg. Clariden Leu AG and Aberdeen Asset Management Plc say evidence of improvement of the U.S. economy and European debt crisis is needed to revive the market after the yield premium of Indian debt over Treasuries widened to the most since 2009.
“When sanity prevails and things calm down, India should be among the first markets where the yield will come down because companies are doing well and the economy will continue to grow,” said Hemant Dharnidharka, a Hong Kong-based credit analyst at SJS Markets Ltd. “We don’t see the yields coming down in the next few months as uncertainty is likely to continue.”
Ballarpur Industries Ltd., India’s biggest paper maker, was the only company to sell dollar bonds last month, issuing 9.75 percent perpetual notes with a call option in August 2016, Bloomberg data show. While the coupon is higher than the 5.59 percent average for Indian dollar debt tracked by the HSBC Holdings Plc index, it’s lower than the 9.9 percent rate the company paid on five-year rupee notes in July last year.
State-controlled Indian Bank will delay raising $500 million on the bond market “until the pricing is attractive,” V. Rama Gopal, an executive director at the lender, said in an Aug. 10 interview.
The average yield Indian companies pay to borrow in dollars over Treasuries widened 101 basis points, or 1.01 percentage point, to 487 basis points last month after Standard & Poor’s cut the U.S.’s top credit rating one level to AA+ on Aug. 5, triggering a global rout in equities.
The extra yield demanded by investors to hold Indian notes over U.S. debt touched 493 basis points on Aug. 30, the widest gap since December 2009, HSBC data show. Similar spreads for China widened 76 basis points to 444, and by an average 62 to 346 across Asia.
Last month’s loss in Indian dollar bonds was dwarfed by a 27 percent plunge in October 2008 following the collapse of Lehman Brothers Holdings Inc., JPMorgan data show.
“There is a pipeline of Indian issuers and if markets do recover, as we think there is a good chance they will, then the new issue market will open up,” said Viktor Hjort, a Hong Kong-based credit strategist with Morgan Stanley. Indian banks are priced between 50 and 100 basis points wider than a month ago, making valuation “quite a bit more appealing” for investors, he said.
Spreads on State Bank of India’s $1 billion of 4.5 percent bonds due July 2015 widened 98 basis points last month to 345, according to Royal Bank of Scotland Group Plc prices. Relative yields on ICICI Bank Ltd.’s $750 million of 5.5 percent, March 2015 debt increased 114 to 409.
“I expect credit spreads to compress when the global picture improves,” said Cornel Bruhin, who helps oversee about $4 billion of emerging-market assets at Zurich-based Clariden Leu. “It’s a good buying opportunity at current levels.”
Debt Sales Slow
International bond sales from India have slowed since reaching $7.8 billion in the six months to June 30, and this quarter’s issuance of $1.2 billion so far is the lowest since the same period of 2009, data compiled by Bloomberg show.
Offerings of local-currency debt totaled 1.03 trillion rupees ($22.3 billion) this year to Aug. 31, down 27 percent from the same period last year, as the highest benchmark rates since 2008 deter companies from borrowing, the data show.
India’s top-rated companies pay 9.4 percent to borrow in rupees for five years, 46 basis points higher than at the end of 2010, Bloomberg data show.
The rupee’s 2.6 percent decline this quarter has also made companies wary of borrowing funds in foreign currencies, according to SJS Markets. The rupee gained 0.5 percent to 45.88 per dollar today. India’s financial markets were closed yesterday and Aug. 31 for holidays. Companies that are “bullish on the currency” may want to borrow should the rupee weaken to 47, said SJS Markets’ Dharnidharka.
The Reserve Bank of India has boosted the repurchase rate 11 times since March 2010 to contain inflation that has held above 9 percent this year. An economy that grew a faster-than-estimated 7.7 percent last quarter is adding to pressure for the central bank to continue raising the rate from its current 8 percent level.
Indian growth compares with 9.5 percent in China and 1 percent in the U.S., government figures show. Euro-area growth slowed to 0.2 percent in the second quarter.
“There is a compelling case for emerging market debt as these economies are on a sounder footing at least when the West is in trouble,” said Pierre Faddoul, a Singapore-based credit analyst at Deutsche Asset Management (Asia) Ltd. Still, “there is more clarity that needs to be found on global growth before investors start investing.”
Yields on the India’s benchmark 10-year bonds fell 14 basis points in August, the most in six months, to 8.32 percent, according to the central bank’s trading system.
The cost of insuring the debt of government-owned State Bank of India, seen as a proxy for the nation, climbed 83 basis points last month to 275, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. Five-year credit-default swaps on Brazil rose 29 to 143 in the same period, while those for Russia increased 48 to 190 and China contracts jumped 21 to 108.
The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The central bank forecasts economic expansion will slow to 8 percent in the year ending March, from 8.5 percent in the previous year. State Bank, the nation’s largest lender, posted a bigger-than-expected 46 percent drop in first-quarter profit as bad loans increased.
Investors are waiting for economic data that suggests U.S. growth is “no longer slowing or is accelerating,” said Scott Bennett, Singapore-based head of Asian credit at Aberdeen Asset Management, which oversees $298 billion globally. “After the traditionally slow summer period, we expect the primary market to open again in September, and depending on market spreads Indian issuers may try to tap again.”