Markets

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

There's a green bubble in India, with investors flocking to fund a planned tripling of renewable energy capacity over the next five years. 

Luckily for Singapore's sovereign wealth fund, one of the more gung-ho backers of solar, wind and hydroelectric power in the country, there's a bigger bubble out there -- in global bond markets -- that's allowing the green mania to grow.

Love Thy Risk
Investors' reward for buying risky Asian debt has shrunk to a paltry amount in just over a year
Source: Bank of America Merrill Lynch

GIC Pte owns 64 percent of Hyderabad-based, but Mauritius-incorporated, Greenko Energy Holdings. The latter appears to have worked out that there's nothing like a red-hot market to push through a $950 million, seven-year issue. 

The deal, which is tipped to be one of Asia's biggest green bond sales, may end up offering no more than 5 percent. In which case GIC should send a "thank you" note to the coupon-hunters. For investors, it's another matter. The issue won't give them much of a safety margin.

The structure of the bond is convoluted, thanks to India's complicated capital controls. A Dutch special purpose vehicle -- Greenko Dutch BV -- will issue the dollar bonds, and use the proceeds to buy rupee-denominated notes issued by Greenko subsidiaries. Together these units have 2.5 gigawatts of operating assets in 13 Indian states, or about 4 percent of the total renewable capacity in that country.

These subsidiaries supply to utilities that pay for the power in rupees -- and not always on time. So that's one risk.

Now throw in an estimate from Moody's Investors Service that the borrower would have funds from operations of just about 1.5 to 2 times its interest payment obligations. Moody's rates the bond Ba2, which, according to its definition, means an IOU that carries "substantial credit risk, and has speculative characteristics."

So shouldn't the note be paying more than 5 percent? That's where India's capital controls come in.

Greenko scandalized the conservative Indian central bank in 2014 when it raised $550 million in a similar fashion, paying an 8 percent coupon on five-year debt. At the time, the Reserve Bank of India allowed foreign-currency borrowing at a maximum 350 basis point premium over six-month Libor (when Libor wasn't even half a percent). In other words, the RBI didn't want high-yield borrowers to go abroad. By pushing dollar debt onto the books of an offshore entity, Greenko skirted that limit.

The innovation made the central bank livid enough to threaten issuers with penal action, causing a short-lived meltdown in Greenko's bonds in November 2014.

The One That Got Away
The innovative structure of Greenko's 2014 dollar bond made the Indian central bank unhappy about the breach of its capital-control regulations
Source: Bloomberg

The RBI is still ultra-conservative. Now that Libor is at 1.5 percent, the RBI's ceiling on the spread any Indian borrower can pay is 300 basis points for maturities of up to five years and 450 basis points for longer tenures. This limit holds even for rupee bonds sold overseas, the monetary authority said in June, taking the spice out of the so-called "masala bonds" for high-yield issuers.

Greenko will have to juggle the need to get investors to accept a bond it can afford to pay, and staying on the right side of the central bank's hard stance on foreign-currency liabilities.

It might pull this off. Investors are undemanding right now. And hopefully, the poor health of India's largely state-owned banking system would prompt the RBI to be a little more relaxed about letting companies other than state-backed monoliths accept foreign money.

India is starting to enjoy record-low solar tariffs of 4 U.S. cents per kilowatt hour. Those depend on lacing the country's bubblicious green aspirations with the froth in global bond markets.

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

  1. The new offer will be partly used to refinance existing debt, including the $550 million note that had so offended the RBI.

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net