Junk Sales Near Record as Tata Steel Joins Bharti: India Credit
Tata Steel Ltd. (TATA) joined Bharti Airtel Ltd. (BHARTI) selling junk bonds overseas as demand for relatively higher yields pushes issuance of non-investment grade debt by Indian companies close to a record.
The nation’s biggest steelmaker sold S$300 million ($243 million) of 10-year Singapore dollar notes at 4.95 percent on April 25, data compiled by Bloomberg show. Bharti, the country’s largest mobile-phone operator, borrowed $1.5 billion in two tranches at 5.125 percent in March. The bonds mark the first speculative-grade international issuance by Indian companies since a record $1.85 billion raised in 2011, the data show.
Junk bond sales almost tripled to $14.5 billion in Asia excluding Japan last quarter from a year earlier as the region’s millionaires joined global investors in driving demand. Yields on Asian dollar-based speculative debt have fallen to 6.73 percent from 9.15 percent a year ago, according to Bank of America Merrill Lynch indexes, while Bloomberg-compiled data show India’s top-rated companies pay 8.83 percent to sell 10- year rupee notes.
“Tata Steel and Bharti are very well-known among overseas investors,” said Bharat Shettigar, Singapore-based senior credit analyst at Standard Chartered Plc, the top arranger of overseas bonds for Indian companies this year. “The reception has been quite good. Given that yields in India continue to be relatively high, there’s an opportunity for companies to tap the international market.”
Mumbai-based Tata Steel is ranked BB by Standard & Poor’s and Ba3 by Moody’s Investors Service, the second- and third- highest junk ratings, respectively. Billionaire Sunil Mittal’s Bharti is assessed BB+ by S&P, the top non-investment grade rating. The company based in New Delhi sold its maiden dollar- denominated bonds last month.
The junk bonds sold by Tata Steel and Bharti account for about 22 percent of the $8 billion raised so far in 2013 by Indian companies, led by state-backed issuers, according to data compiled by Bloomberg. That’s the best start to a year on record and follows a slump in dollar borrowing costs to record lows as central banks from the U.S. to Europe and Japan print money to boost global growth.
Average dollar yields for local issuers touched an all-time low of 3.805 percent on March 18 and are at 3.92 percent, HSBC Holdings Plc indexes show. A similar gauge for all Asian debt is at 3.48 percent. Global high-yield debt returned 1.8 percent this month, compared with 0.28 percent in March, according to Barclays Plc indexes.
Tata Steel and Bharti’s borrowing costs are higher than the 3.25 percent coupon on investment-grade dollar notes sold by Mumbai-based State Bank of India this month, according to data compiled by Bloomberg. The nation’s biggest lender by assets raised $1 billion selling notes maturing 2018.
Chief Financial Officer Koushik Chatterjee said in February that Tata Steel plans to raise as much as 130 billion rupees ($2.4 billion) in the next six months to partly fund a 6 million metric-ton mill to be built in phases, the first of which will be completed by August 2014.
The alloy maker needs to repay $9.3 billion bonds and loans by the end of this decade, according to data compiled by Bloomberg. The company raised $547 million selling 4.5 percent convertible notes in 2009. Most of Tata Steel’s net debt of $10.5 billion was taken to fund the $12.9 billion acquisition of steelmaker Corus in January 2007.
Wealthy Asians are looking beyond equity markets and have moved as much as 25 percent of their investments into fixed income from 5 percent previously, Gordon French, HSBC’s head of global markets for Asia Pacific, said in an interview in Hong Kong last month. There were 3.37 million millionaires in the Asia-Pacific region in 2011, more than in North America for the first time, according to a June report by Capgemini SA and RBC Wealth Management.
Still, demand for Indian junk bonds may be limited to the biggest borrowers and smaller issuers may find it difficult to raise funds, Hemant Dharnidharka, the head of credit research at SJS Markets Ltd. in Bangalore, said by telephone April 25.
REI Agro Ltd., a New Delhi-based rice producer, postponed the sale of five-year dollar bonds, according to two people familiar with the matter, who asked not to be identified because the details are private. The company, through its unit Ammalay Commodities JLT, was marketing the notes at about 12 percent, another person said. REI’s Chief Financial Officer Ranjan Majumder declined to comment when reached by telephone April 26.
The cost of insuring the debt of State Bank, considered a proxy for the sovereign, using five-year credit-default swaps fell 26 basis points since Dec. 31 to 200, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.
Default risk has ebbed after Minister Manmohan Singh’s government in September began opening up industries including aviation and retailing to foreigners and cut taxes on companies’ overseas debt to boost investment and economic growth. Singh’s biggest policy push in a decade was complemented by monetary easing by the Reserve Bank of India, with two interest-rate cuts this year.
Central bank Governor Duvvuri Subbarao will lower the RBI’s 7.5 percent repurchase rate 25 basis points at a May 3 review, according to 22 of 26 economists surveyed by Bloomberg. Singh and Subbarao’s policies have helped India’s sovereign bonds rally the most among the four-largest emerging markets.
Indian debt returned 4.7 percent in 2013, beating a 1.8 percent gain on Chinese notes and 3.6 percent on Russian bonds, according to indexes compiled by JPMorgan Chase & Co. Brazilian securities lost 3.7 percent.
The yield on 10-year government notes in India dropped 31 basis points, or 0.31 percentage point, this year to 7.74 percent today. The securities touched a 33-month low of 7.738 percent on April 23 and offer an extra yield of 608 basis points over similar-maturity U.S. Treasuries. The rupee has climbed 1.2 percent to 54.34 per dollar in 2013.
“The government’s trying to drum up investment opportunities and is determined to implement wide-ranging economic reforms to help improve the funding situation in India,” said Desmond Soon, a Singapore-based fund manager at Western Asset Management Co., which managed $461.9 billion of assets globally as of Dec. 31. “There’s a bit of a window for companies that aren’t state-backed to tap international markets.”