Biggest Mortgage Lender Opens Market for Indian Masala Bonds

  • RBI permitted companies to issue offshore rupee debt last year
  • Other issuers with plans include NTPC, Rural Electrification

India’s first Masala bond from Housing Development Finance Corp., the nation’s biggest mortgage lender, opens the door for other high-quality issuers to tap the nascent offshore rupee-debt market, according to Credit Suisse Group AG and Nomura Holdings Inc.

HDFC on Thursday sold 30 billion rupees ($447 million) of three-year, one-month notes at an annualized yield of 8.33 percent, compared with the 8.45 percent initial guidance on the deal. It is said to have paid 8.38 percent on a three-year onshore bond issue. Companies including NTPC Ltd., India’s largest power producer, and Rural Electrification Corp. have shown interest in tapping the Masala bond market.

The HDFC deal may spur activity in a market that’s been inactive since the Reserve Bank of India in September allowed domestic companies to issue offshore rupee bonds to reduce dependence on foreign currencies including the U.S. dollar. Nomura is in advanced talks with a number of companies and expects a “robust issuance calendar” of Masala debt in coming months, Utpal Oza, the head of investment banking at the Japanese lender’s local unit, said in an e-mailed note.

“The more quality names will be able to tap the initial offshore INR bond market, not any and all the names,” said Gaurav Pradhan, co-head for investment banking and capital markets at the Indian unit of Credit Suisse. “Investors in December wanted a yield curve higher than the domestic curve. Investors have now come just below par than the domestic yield curve.”

Credit Suisse and Nomura were bookrunners to HDFC’s issuance along with Axis Bank Ltd.

Market Open

The Masala bond market may get a boost for an estimated $20 billion in foreign-currency deposits that are due to mature beginning September. These are funds that the RBI lured into the country through discounted foreign-currency swaps in 2013 to help lift the rupee from a record low.

“Credit Suisse garnered a large part of money that came in 2013 into FCNR deposits,” Pradhan said. “Some of the FCNR money that will mature in 2016 may rollback into the country through the Masala bonds.”

The Washington-based International Finance Corp. in 2013 became the first issuer of offshore rupee bonds and has since been a regular seller of such securities. Local companies though have till now faced some resistance from investors demanding a premium to invest in Masala bonds, named after the spices found in Indian curries.

Sale Plans

HDFC received more than 66 billion rupees worth of orders from 42 investors for the sale of its notes, according to a person familiar with the offering, who is not authorized to speak publicly and asked not to be identified. A majority of the interest was from the Asian region and from fund managers, the person said.

“HDFC is an exceptional credit when it comes to recognition in the international space,” said Ajay Marwaha, director for investments at Sun Global Investments Ltd. in London. “The biggest positives are that a deal got printed and the market has opened for the many Indian issuers who have been waiting.”

NTPC mandated five banks for a planned green Masala bond, a person familiar with the planned offering said June 20. The company’s first issuance may be as much as $250 million, Finance Director Kulamani Biswal said in a phone interview the same day. NTPC’s spokeswoman Deepna Mehta didn’t reply to an e-mail seeking comment.

Rural Electrification Corp., a state-owned lender to electricity projects, sent a request for proposals to banks last month for a planned $200 million Masala issue, a person familiar with the matter said June 13. Finance Director Ajeet Agarwal said the company is yet to appoint banks to manage the sale.

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