Let good times roll

Early signs since Narendra Modi’s election victory hint at India’s enormous potential in the global capital markets, but can issuers take advantage of international investors’ new-found confidence?

India seems certain to remain one of the favourite emerging-market destinations for global investors in 2015. With a pro-reform government at the helm, confidence in Asia’s third-largest economy is running high.

Funds are flowing into the domestic debt markets at a record pace, with foreign investors pouring around US$26bn into local Indian debt in 2014. International investors are also clamouring for more offshore bond offerings. Delhi International Airport’s US$288.75m seven-year secured bond, priced to yield 6.125% in late January, was among the first high-yield issues of the year out of Asia.

However, market volatility and reform progress will keep testing investors’ appetite for Indian credits.

“The outlook for Indian credits is very promising”, said Mumbai-based Neville Fernandes, head of debt capital markets origination for India at Citigroup.

Delhi Airport’s order book of over US$5bn “gives some kind of indication of the amount of money that is chasing (Indian) credit”, he said.

“In the emerging markets, your choices are fairly stark. People don’t want to buy Russia or Brazil or other oil economies. Most investors have had enough of China, too.”

Borrowers and bankers are rejoicing over the growing interest in Indian credit, a trend that has been slowly picking up since 2013.

“In the last two years, we’ve seen a good increase in [US dollar bond] volumes. In fact, 2014 closed with volumes of over US$18.5bn, which was twice what we have seen in the two years prior,” Fernandes said.

“In the emerging markets, your choices are fairly stark. People don’t want to buy Russia or Brazil or other oil economies. Most investors have had enough of China, too, but there is continued scarcity when it comes to India”.

Bankers or analysts are not putting any numbers to the potential offshore bond pipeline from India in 2015, but rough estimates suggest a pipeline of around US$25bn, provided global markets remain conducive.

Signs of improvement in the Indian economy are emerging, with the help of the stimulus of a recent rate cut from the Reserve Bank of India. The Union Budget towards end of February is also expected to offer further measures to boost investor confidence.

Many believe the stage is being set for a sovereign rating upgrade.

“A rating upgrade will be a big trigger for global investors. In the next 12–24 months, unless we do something really wrong, India is an economy that will grow at a relatively stable rate,” Fernandes said.

“For a credit investor, looking to balance risk and reward, India is clearly in the green zone”

Globally, India has ratings of Baa3 from Moody’s and BBB– from both S&P and Fitch. S&P removed its negative outlook on the rating in September, and analysts find the country in a much better position now relative to 2013, when talk of an end to US monetary easing rocked the currency and roiled Indian markets.

A sharp reduction in the current account deficit to 1.7% of GDP in fiscal 2014 (versus 4.2% in 2012), lower inflation and expectations of economic growth reverting back to over 6% from FY16, is strengthening the outlook for India.

Consumer prices are expected to rise an average of 6.7% in FY15, far slower than the 9.5% in 2014 and 10.2% in 2013.

India wants more

Market players reckon that rising appetite for Indian credit – both offshore and onshore – will encourage more issuers to diversify their funding resources, including tapping bond markets abroad.

Enhanced foreign investor participation will also help deepen the shallow local debt markets and push more investors down the credit curve.

“There is adequate liquidity and appetite for Indian credit. The question now is how many companies are willing to issue?” asked Rakesh Singh, group head, investment banking, capital & commodity markets, HDFC Bank.

“Corporates are unable to raise bonds because they don’t have new projects that need funding,” he said.

Policy paralysis and a slowing Indian economy forced many companies to abandon expansion projects in the past few years. However, analysts expect capital expenditure to resume in FY15 and pick up steam a year or two later.

In the short term, however, India Inc remains highly leveraged and many companies need more equity than debt.

For instance, the top 500 companies listed on the Bombay Stock Exchange have an aggregate debt of Rs287.6trn, according to a study from India Ratings & Research last November. As many as 82 of these 500 large borrowers were already undergoing formal debt restructuring, the agency said.

These 500 companies have a median leverage multiple of 5.4, the highest in the last decade. It would take an equity infusion of at least Rs7.043trn or US$114bn to bring that debt ratio back down the 2011 level of 3.3–3.5, the rating agency said in December.

Yet, market players feel the top-tier Indian corporations and state-owned entities are at little risk of losing their access to capital. Offshore markets are also open to lower-rated Indian credits with a natural currency hedge, as well as those with assets to pledge as security.

“India is moving fast… it will be for investors to catch up”, HDFC’s Singh said.