Shallow Bond Market Trips Modi's $1 Trillion India Wish List

  • Curbs on insurers, pension funds hampering financing
  • S&P sees $251 million/day funding needs through March 2019

GVK Power & Infrastructure Ltd., an Indian builder of airports and power plants, has about 235 billion rupees ($3.6 billion) of debt outstanding and none of that was raised selling bonds.

For many Indian infrastructure developers like GVK, corporate bonds aren’t an option because they don’t enjoy a top debt rating like Larsen & Toubro Ltd., the nation’s biggest engineering services provider. Local rules bar insurers and pension funds from buying securities ranked below AA, shrinking the pool of funds. What’s worse, individuals, wary of defaults, largely shun such notes.

The curbs on the corporate bond market are hurting many projects needing long-term financing at a time when India’s lenders, slammed with stressed assets, are also reluctant to take on more risk. Restrictions must be eased if Prime Minister Narendra Modi’s $1 trillion infrastructure wish list, which includes zero blackouts, bullet trains and navigable waterways, is to become reality, according to Axis Bank Ltd., the No. 1 arranger of rupee bonds since 2007.

“It is very difficult for infrastructure projects to get a top rating unless they are exceptional like Larsen,” said A. Issac George, GVK’s chief financial officer. “It wouldn’t make sense to tap the corporate bond market,” he said.

The credit rating of the issuer is critical in the corporate bond market, said Suzlon Group Chief Financial Officer Kirti Vagadia.

Modi is seeking to upgrade India’s creaky infrastructure, whose quality is ranked below that of Kazakhstan and Namibia, to accelerate growth and create more jobs, his key election planks last year.

Inherent Issues

Indian infrastructure companies need to raise 47.2 trillion rupees through March 2019, or about $251 million a day, of which 16 trillion rupees will have to come from bank borrowings and 8.8 trillion rupees from corporate bonds, according to estimates by the local unit of Standard & Poor’s. That compares with about $19.6 billion of corporate bonds sold by infrastructure developers in 2014.

“There are inherent issues because of which the corporate bond market hasn’t financed infrastructure in a big way," said Shashikant Rathi, the Mumbai-based head of investments and capital markets at Axis Bank. “Tweaking of restrictions on investments done by long-term investors in corporate bonds will help build a steady funding source for infrastructure."

While policy makers, including finance ministers and officials of the Reserve Bank of India, have called for expanding and deepening the corporate bond market for at least 15 years, progress has been only modest.

The central bank made it compulsory to report traded deals in the secondary market to increase transparency, while exempting bank bonds maturing in seven or more years from reserve requirements to boost funding for infrastructure and affordable housing. Modi revived sales of tax-free bonds and the Reserve Bank of India allowed credit default swaps to help hedge credit risk. It also enabled lenders to give credit guarantees so an issuer could borrow funds at a competitive yield.

Trading volume has almost doubled to a monthly average of 886 billion rupees this year, from 453 billion rupees in 2011, according to data provided by the Securities and Exchange Board of India. That compares with about $40 billion in the U.S. Indian issuance this year is set to reach a record 5 trillion rupees.

But, individual investors avoid these bonds because India lacks a strong recovery mechanism in case of defaults. Finance Minister Arun Jaitley has said the government will propose a new set of bankruptcy rules, scrapping laws that date back a century, to help slash the time it takes to wind up a dying company and reclaim dues.

Creditors in India recover about 25.7 cents on the dollar in the 4.3 years that it takes to resolve insolvency, World Bank data show, compared with 80.4 cents in the U.S. after less than half that time.

Stressed Assets

Loans to infrastructure projects in India grew by 8.2 percent to 9.4 trillion rupees in the year to Aug. 21, the slowest pace in at least four years and less than half of the 20 percent annual growth seen in the year to August, 2013, RBI data show.

Stressed assets at Indian banks rose to 11.1 percent of total lending as of March 31 and the infrastructure backlog of delayed projects has climbed to 13.5 trillion rupees, official data show. GMR Infrastructure Ltd., GVK, Jaiprakash Associates Ltd., Lanco Infratech Ltd. have a combined debt of $24.5 billion. GVK was briefly downgraded to default by Care Ratings Ltd. this month because of delay in debt servicing before it was raised to BB.

Most issuances are privately placed with banks that hold them till maturity, while little interest from individual investors has also meant little trading and price discovery.

“There are only select issuers that can come and tap the market for financing rather than a variety of issuers,” said Kaustubh Kulkarni, Mumbai-based managing director of debt capital markets for South Asia at Standard Chartered Plc. “What’s not there is the risk appetite for a wide credit spectrum of borrowers. The market lacks breadth.”

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