Rupees Taste Better Than Dollars for Debut Masala Bond Sellers

  • At least three Indian companies are planning masala issues
  • Barclays forecasts a $50 billion market within three years

Masala bonds are becoming more palatable for issuers and investors, encouraging Barclays Plc to forecast the market will reach $50 billion within three years.

At least three companies plan to be the first Indian firms to sell the offshore rupee-denominated notes, which are named after the spice found in Indian curries. International Finance Corp., the funding arm of the World Bank, sold a 1.7 billion rupee ($25.6 million) masala bond on Monday, adding to more than 100 billion rupees it’s offered since an inaugural sale in November 2013.

India’s central bank in September allowed companies to sell local bonds overseas to help wean them off foreign currency debt and provide financing for Prime Minister Narendra Modi’s $1 trillion wish-list of infrastructure projects. Bonds issued in local currencies overseas, such as China’s Dim Sum notes, are often favored by funds reluctant to venture into unknown markets, allowing issuers to obtain lower borrowing costs.

“Yields on rupee offshore bonds are likely to be lower than rupee onshore counterparts,” said Avinash Thakur, Hong Kong-based managing director of debt capital markets at Barclays. “This product will expand the current investor base” for issuers, he said.

Local notes are already a key source of funding for Indian companies, which have issued 3.6 trillion rupees of domestic bonds this year, in line with the 3.7 trillion rupees in the year-earlier period. Bank loans, on the other hand, are are being issued at near the slowest pace in 20 years amid rising bad debts and inadequate risk buffers.

Foreign Curbs

Companies have also been restricted in their foreign currency borrowing. Reserve Bank of India rules state that issuers can’t sell three- to five-year debt abroad with an all-in cost of more than 350 basis points over the London interbank offered rate. The ceiling is 500 basis points for notes of more than five years.

In spite of the limits, Indian non-financial corporations sold a record $12.5 billion offshore in 2014 and issued another $5.4 billion this year.

State-owned companies are likely to be the first masala issuers. India Infrastructure Finance Co. and Indian Railway Finance Corp. are seeking arrangers for a sale, people familiar with the matter said this month. Housing Development Finance Corp. is also planning to issue notes, while NTPC Ltd. has mandated banks for an offshore bond.

Masala issuers will still have limitations. Offshore debt sold under the new rules will be capped at $750 million a year per seller and must have a minimum maturity of five years.

Rupee, Yuan

“We see appetite for these bonds,” said Ananda Bhoumik, a Mumbai-based analyst at Fitch Ratings’ local unit India Ratings & Research. “The key for the success of these bonds will be a stable exchange rate.”

The rupee was the fifth most-volatile currency in Asia over the past year, according to data compiled by Bloomberg. The yuan was the second-least volatile, with the Chinese currency now the most used by Asian non-financial corporations to issue offshore debt. The borrowers sold a record 860.9 billion yuan ($135.1 billion) of dim sum notes this year, the data show.

Investors who can’t buy bonds directly in Mumbai may be attracted to global rupee notes from Indian companies, according to Singapore-based Wontae Kim, a research analyst at Western Asset Management Co., which had $446.1 billion under management on Sept. 30. But for those who can buy directly onshore, the allure may be lacking.

Buyer Appeal

“There has been chatter that offshore yields could be lower than their onshore counterparts as a premium for accessibility,” making the offshore rupees potentially less attractive to buyers, Kim said. “The liquidity backdrop provided by onshore players will not be present in the offshore space.”

The ability to bypass Indian onshore restrictions is still likely to generate enough demand for masalas, Barclays’ Thakur predicts. In 2014, overseas investors bought $26.5 billion of Indian government and corporate bonds onshore and in the first half of this year they acquired $7.5 billion, according to the lender. 

“With India likely to be among the fastest-growing large economies in the world, global fixed income investors have shown an interest in adding to their exposure," Thakur said. "However, the availability of investable assets is limited. The response to IFC’s Masala bonds provides a good indication of the strength of the pent-up demand for such debt.”

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