Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Perhaps it was the bhang milkshake on their latest trip to New Delhi, but global bond investors are acting a bit odd around Indian junk. Or maybe it's the central bank vice of pumping unlimited amounts of cash into the world that's made them act funny. Whatever, this might be a good time for a detox, possibly in an ashram, to confront some of the real issues faced by the subcontinent.

High-yield companies in India have mostly been prevented from borrowing abroad by rules that set a limit of 5 percentage points over Libor for foreign-currency debt. While there are loopholes (for example if the cash is raised by a foreign subsidiary and isn't repatriated, it's fine) only a handful have accessed international markets.

Cheap Funds
Indian junk-rated companies are paying record low yields on dollar debt
Source: Bloomberg

Amid unprecedented stimulus from the world's major central banks, coupons on high-yield bonds in Asia, especially those from the subcontinent, have dropped so much that a host of new companies are now able to sell dollar debt. Because they're scarce in South Asia, the appetite for the securities is so high that some issuers aren't bothering to include the standard disclosure that normally is part of a junk note. 

Punching Below Its Weight
A small portion of Asian junk bonds come from India, with a few companies such as Tata and Vedanta, which can keep funds offshore, responsible for most
Source: Bloomberg

A case in point: Glenmark Pharmaceuticals, which sold its first straight dollar bond on Monday. The coupon was 4.5 percent, which translates to a spread of about 325 basis points over Libor, well inside the regulatory limit. The low yield for a company rated two notches below investment grade happened even as the borrower failed to detail its other debts in the prospectus -- "description of material indebtedness," a standard (albeit not mandatory) feature of junk bonds was missing. No worries, the $200 million of notes still received bids equivalent to more than $1.6 billion. With so much cash around, who cares for disclosure, risks or ratings? If it's from India and it pays more than zero, it's good. 

Take a step back. Certainly India has the world's second-largest population and one of the highest growth rates among large economies. It's also the place where nonperforming loans have soared in the past few years. 

So Delinquent
The percentage of debt going unpaid in India is one of the highest in Asia
Source: World Bank; Bloomberg

So no matter how rare it is to see an Indian high-yield bond, investors must not lose touch with reality. Junk is junk, and should carry disclosures, and yields, to match.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net