REVIEW: INDIA IMPRESSES MARKET WITH MORE DEBUT HY DEALS
Fri, 2014-11-07 14:48 by Lianting Tu
SINGAPORE, Nov 7 (IFR) - Two debut US dollar high-yield offerings from India this week underscored the heightened offshore demand for bonds from the country as it embarks on ambitious economic reforms.
JSW Steel and Indiabulls Real Estate priced inaugural bond issues and enjoyed the increased appetite for riskier credits from India as investors bet that the nation, under Prime Minister Narendra Modi, is on track for sustainable economic recovery.
“For investors, Indian high yield is a diversification play. Investors are keen to get exposure to well-established high-yield borrowers other than Chinese property developers,” said Brian Kim, DCM Syndicate at Credit Suisse. “For Indian issuers, they see attractive all-in cost of funding in the international debt capital markets as yields continue to remain low, particularly after the new government in India lowered the withholding tax on foreign currency denominated coupon payments.”
The Modi-led government reduced the withholding tax to 5% from 20%, effective since early October.
The successful debut bond issues, especially from highly levered Indiabulls Real Estate - the first from India’s property sector - show that a new funding channel is now open for many lower-rated private sector companies from the country. The performance of the transactions also bodes well for iEnergizer, an Indian business process outsourcer, which is planning to debut in the US dollar market with a USD135m bond offering.
Indiabulls sold USD175m five-year non-call three last night after cutting the issue size from targeted USD250m.
“Indian issuers have been relying heavily on the bank market to date and we now hope that the bond markets will give them better access given the flexible covenant package and efficient cost of financing,” said Amit Sheopuri, co-head of Asia DCM at Citi.
Cheaper funding
JSW Steel’s (Ba1/BB+) USD500m 4.75% five-year offering, for example, translates to 284bp over Libor, which is quite competitive compared to the steelmaker's onshore funding costs, Rajeev Pai, CFO of JSW, wrote in an email.
The company intends to use the proceeds to prepay certain more expensive rupee debt, which is costs 12.25%-13%, he wrote.
The bond indenture is also quite loose, Charles Macgregor, head of research at Lucror Analytics, wrote in a research note. The indenture did not impose restriction on subsidiary debt or liens, or cash leakage. There was also weak protection on event risk as change of control will only be triggered by a rating downgrade, he wrote.
It is, however, a different case for B1/B+/B+ rated Indiabulls, because it has much weaker credit fundamentals. Moody’s said its covenant package provides stronger protection than on typical high-yield offerings from Asia, highlighted by carve-outs that are well below the Asian average.
New structures
In addition, investors also liked this week's Indian US dollar high-yield deals because they were structured in a more investor-friendly way than high-yield deals from China, which comprise the majority of the Asian high-yield market.
Offshore investors in Chinese bonds are typically structurally subordinated to onshore creditors.
That is not the case in Indian high-yield this week, however. On the JSW bond, the issuer was the onshore entity, a factor that made investors comfortable with the structure.
“The structure for JSW Steel is better than Chinese property bonds in terms of onshore-offshore subordination,” a Singapore-based portfolio manager said.
The Indiabulls trade comes with an onshore parent guarantee, which brings offshore debt pari passu with domestic debt on the parent level. It is the first time an Indian borrower used such a structure.
Indian regulations allow onshore parent to provide guarantee for offshore debt as long as the proceeds will be used overseas. Indiabulls will use the funds to repay share application money used in connection with the acquisition of London property.
Still, the Indian Government could have done more to encourage offshore fundraising by the private sector.
“Indian regulators have room to do more to offer investors more options to get closer to the onshore assets,” said Vijay Chander, executive director for fixed income at Asia Securities Industry and Financial Markets Association.
Lianting.tu@thomsonreuters.com; Manju.dalal@thomsonreuters.com