IFR Asia: India has seen a big surge in offshore bond issuance this year. What have the highlights been?
Sean Henderson, HSBC: If you look at India G3 issuance in 2023, volumes were just over US$4bn, with about 80% of that in investment grade. This year however, we’ve seen just over US$10bn of issuance, up 150%, with approximately 73% of that in high yield.
That’s a massive shift in the market, and it’s been driven by a significant improvement in credit spreads, and falling interest rates, which has made the offshore market much more competitive. Borrowers have had access to offshore bonds through 2023, but it’s been the rebound in the US dollar bond market pricing relative to loans and local currency, particularly for high-yield issuers, that’s made all the difference in getting them to tap the offshore investor base.
We’ve also seen a lot of debut or relatively rare high-yield issuers this year, including Piramal Finance, Sustainable & Affordable Energy for Life, Biocon and Motherson, so there’s a lot more diversity on offer for investors. The non-bank financial companies have also come to market wanting to diversify their funding sources, because onshore liquidity has been a bit tricky for this sector at times.
Interestingly, India now accounts for about 70% of the Asia ex-Japan high-yield bond market, which is very significant. And the diversity of sectors coming to market, from infrastructure to renewables, tech and healthcare has been really attractive for investors.
IFR Asia: Nitin, what have you seen this year in terms of issuance trends?
Nitin Soni, Fitch: The corporate sector is still very dull I would say. We have seen a lot of issuances from the banks and NBFCs because the central bank has put a rein in on their access to the local banks. We’ve seen a few names from the renewable sector such as Adani Green. But going forward, as the Fed cuts rates further, I expect to see a lot of issuances, especially from commodity and infrastructure companies.
Related sectors such as steel and cement should come to the market. And then the other leg of the issuances could be just pure refinancings from maybe the telecom sector, amidst others.
IFR Asia: Amit, you’re on 99% of the India deals. What have been the highlights for you?
Amit Singh, Linklaters: The NBFCs tapping the US dollar markets has been a huge theme, and recent issuances include those from Piramal Finance, Muthoot Finance, Manappuram Finance and there’s been multiple issuances from Shriram Finance. Shriram has also done a very interesting structured bond.
It’s harder for them to raise bank lending as the RBI has increased the risk rating, and therefore, they’ve had to access other liquidity sources. I’m certainly seeing increasing interest from the NBFCs we’ve been speaking with.
It’s a very heartening story to see the proliferation of high-yield issuers coming out of India, as well as on the equity side at the moment, where India currently makes up a substantial percentage of global IPO volume. There’s a unicorn being created, or perhaps several, every week. And as these companies mature, they’ll start doing term loan Bs, high yield and all the rest of it.
It’s a very interesting time, and as interest rate cuts happen, other companies will emerge from the woodwork and hopefully next year will be even better. Obviously, one never really knows how it will pan out, especially with a new president now in the US. But we are cautiously optimistic that next year should be at least as good as this year, if not better.
IFR Asia: Diwakar, from the buyside, how do Indian bonds fit into your Asia portfolio, and do they give you a diversification benefit?
Diwakar Vijayvergia, AllianceBernstein: First of all, when you look at Indian bonds or Indian corporates within the portfolio, you look at it from two perspectives. One is from a top-down perspective with what’s happening with the country. And secondly the risk-adjusted returns of Indian bonds.
Over the last five years and into the next five to six years, India’s growth as per most estimates will be anywhere between 6% to 7%. With that kind of a trajectory corporates will do well too.
We are in a very sweet spot. There’s political stability and policy certainty, which makes India a good place to be and a good place to allocate your capital within the portfolio.
Also, for corporates coming out of India, it’s not those that have no access to liquidity onshore. These are corporates which are actually diversifying their sources of capital. They’re being opportunistic in terms of arbitraging their interest cost.
That is why it becomes a lot easier and cleaner to lend to these guys because you know that there is a fallback option. When the capital markets are closed, we have seen multiple corporates struggle with alternate pools of liquidity with nowhere to go but this is not valid for the Indian names.
Looking at India’s corporate bond performance within any index, like the JP Morgan index or the ICE index, over the last three or four years from a risk-adjusted perspective, it’s probably one of the better returns that you can actually generate. It gives stability and diversification to the portfolio.
IFR Asia: One structure that’s unique to India was the Greenko Power deal where an issuer sells repeat bonds through a special purpose vehicle subscribing to those US dollar bonds and then foreign investors subscribe to those US dollar bonds. But does that make sense for other issuers?
Amit Singh, Linklaters: Well, it depends upon the issuer and their needs. That was a very significant innovation that we worked on in 2016, and the first such group company structure was for Greenko. And the first orphan structure was for ReNew back in 2016, set up in Mauritius. And the reasons for that were pretty compelling.
Diwakar was just talking about the RBI as a good watchguard, preventing some issuers from tapping the markets. But at the same time, the external commercial borrowing (ECB) guidelines have also sometimes limited the ability of issuers to tap the offshore markets. The reason ReNew did that particular bond was they would never have been able to do that bond with the direct issuance within the ECB limits.
That’s, frankly, the reason this was set up, and we had to construct the structure very carefully whereby the offshore and the onshore were completely separate. Essentially, it is an orphan entity, which issues the US dollar bond, uses the proceeds to subscribe to Indian non-convertible debentures (NCDs) or ECBs, as the case may be, and then you have hedging, which happens at the offshore level. In very simple terms that’s the structure. And essentially, you make sure that from an Indian perspective you’re not doing anything to guarantee the returns offshore, so the hedging has to happen offshore.
As far as the Indian issuer, it’s a rupee obligation. I think those structures have been really useful to enable issuers to tap the offshore bond markets for a tenor that they otherwise wouldn’t have been able to issue in had they tried to issue directly. Now, the problem, of course, is that those bonds have been notched down a grade by one rating agency. So it’s getting harder for some people to justify doing those structures if, essentially, it’s going to cost more.
For ReNew it was essentially the same pricing for the orphan structure and the direct structure. I’ll be interested to know the rationale that’s gone into notching down these bonds, but I guess part of it must be that none of these structures have defaulted yet, and therefore people have questions as to what happens when they default.
When we first put the structure together, we were extremely cautious and we went to the RBI a few times. The RBI doesn’t really say, “The structure’s fine,” but what it does is look at it and say, “Well, given what you’ve told me, we see no reason why it’s not in compliance with RBI guidelines.” That’s as good as it gets from the RBI. Frankly, the structure has worked, and I think the Indian counsels who worked on it are also extremely confident that it will.
The orphan structure was a tremendous innovation. If there was a good hedging market in Vietnam, it could solve the issue of not being able to refinance Vietnamese dong debt with US dollar debt.
It has also enabled some of the big M&A deals and
how issuers are thinking of accessing financing. When the big Holcim deal was being contemplated, some of the suitors were thinking of putting the financing together using the orphan structure but in the context of a loan rather than a bond.
IFR Asia: Sean, has that structure now been widely accepted by investors?
Sean Henderson, HSBC: You’ve got the ECB guidelines to consider when doing a direct issuance, but the structure utilising NCDs effectively comes under a different framework. There’s a lot of thought that went into that structure, and investors have largely gotten comfortable with it, provided the FX risks can be hedged, but it’s true that hasn’t been tested in a default scenario.
Broadly speaking though, we’ve seen it widely accepted and well understood.
IFR Asia: Diwakar, what do you think about it? Does this structure give you a lot of comfort?
Diwakar Vijayvergia, AllianceBernstein: I hope it never gets tested in the courts. But look, I think there is a bit of a nuance attached to what Amit and Sean said. When you look at these structures, first of all, you have to get comfortable with the credit quality of the issuer. Structuring we can come back to later, but first you have to get comfortable with the sponsor.
For example, when ReNew was doing the orphan structure in 2016, if it was not for the sponsors like the Canadian pension funds, etc that deal would not have happened. You have to actually assess that if things go pear-shaped who are the guys we are actually banking with?
If it would have been some corporate from India with a family-owned entity these structures would not fly. I still believe that these structures are only useful when the inherent quality of the corporate is good.
Now, there are two structures that we’re actually talking about. Sean is talking about structuring where the issuance is offshore, but you buy into the NCDs issued in India. But what Amit was talking about was an orphan SPV, where there’s no linkage. I still don’t think there are a lot of buyers for orphan SPVs.
When ReNew does an orphan structure or a normal direct issuance structure, a lot of people actually try to classify them as the same kind of a risk because if things go pear-shaped in the orphan structure, it’s actually bound to hit the Indian entity as well and that’s how you take the comfort. So it all still comes back to that.
But initially, there was a lot of premium being attached to the orphan structures. Delhi International Airport did an orphan structure where the 25s were trading wider to the Delhi 26s, even though it was basically the same risk. But the market has now somewhat come to a conclusion that both risks are pretty much the same. Or maybe it’s such a bull market right now that people are just chasing whatever yields being offered.
Amit Singh, Linklaters: Generally these deals will only be done by those who don’t have a group company outside. So when ReNew did it, frankly, they didn’t have what they now have. And now they don’t do the orphan structure anymore, they do more like the Greenko-type structure.
Sean Henderson, HSBC: I think it’s important to re-emphasise the point on credit quality.
A lot of the renewable companies have got strong equity investors in their register, for example Greenko has got GIC, and ReNew’s got CPPIB, and that helps give some comfort to fixed income buyers too. And then there are the strong underlying contractual cashflows, often with 10-to-20-year offtake agreements, and infrastructure like nature of the assets.
So you have to look at the credit profile and structure of the deal in its entirety when you’re assessing the risks, and I think India definitely benefits from the quality of the issuers and sectors that have been coming to market. I think when you start to look at more cyclical sectors or weaker credits, that’s when you need to be especially
alert to structural weaknesses that can increase risks even further.
IFR Asia: India’s cracking down on the use of structures in Mauritius a little bit. What sort of impact will that have?
Amit Singh, Linklaters: It hasn’t happened yet but it could. We have been looking into other jurisdictions. We almost did a deal where we used Singapore but it’s more expensive. Mauritius has been actually the most tax-efficient jurisdiction to do the structure from. We’re also looking at Luxembourg.
Honestly, I think the best option would be if somehow we could get GIFT City to work. That, to my mind, is the way forward. I have been in discussions with some of the Indian law firms who are speaking to the regulators there.
In Mauritius, it’s just a protocol so it hasn’t been signed into law. And at least some Mauritian lawyers are telling me now that the government is realising that a big source of their financial services revenue could get impacted. Perhaps they might never sign it.
But, everyone is starting to think of alternatives. And I think the most promising would be GIFT City. Holland is out because of the new substance requirements. Otherwise, you can do it from Luxembourg, but with 15% withholding tax, as opposed to 7.5% for Mauritius, it doesn’t make a lot of commercial sense.
IFR Asia: Nitin, one of the headaches for Indian issuers going offshore is FX hedging. So what do they have to consider when they’re doing deals?
Nitin Soni, Fitch: Hedging is obviously a significant cost for some of the Indian issuers, in the range of 200 to 300 basis points sometimes. A lot of these Indian companies keep it open sometimes and don’t hedge it 100%. But when they hedge it, they use a combination of forwards, swaps and options. There can be different strategies to hedge, some companies hedge it with a cap. They will hedge dollar/rupee only to the extent of, let’s say, the dollar reaching 95 or 100.
Then there is the other spectrum where companies don’t actually hedge a lot. For the likes of Bharti, they don’t like to hedge because they have overseas operations in Africa and can always refinance in dollars, so they like to take the risk of keeping it open. So far, it has served them right because the rupee has been very stable. For exporters like ONGC, and Reliance, they get dollar-denominated revenue in Ebitda, so they have the luxury of not hedging.
Hedging costs are here to stay but as rates are cut, it will become more favourable to raise in dollars despite the hedging cost.
IFR Asia: One of the more interesting deals this year was the Shriram securitisation that looks a bit like a covered bond. Amit, is that going to set the template for others?
Amit Singh, Linklaters: It’s not really a covered bond because a covered bond has recourse both to the corporate and to the assets. It’s more like a structured deal where essentially it’s a double orphan structure. For Shriram, it’s a true sale of its receivables to an Indian orphan entity, and then the Indian orphan entity issues pass through certificates (PTC) to the offshore orphan entity, which in turn issues dollars to investors.
Ultimately, when you look under the hood, it was really the quality of the receivables and the checks we put in place on those receivables. The whole point was that if you get an investment grade rating for the underlying assets because of the quality of the receivables that could become a very good source of funding for not just Shriram but for other issuers across the non-bank financial company space.
Given the amount of R&D and work that we put into it we were all hoping for many more such deals. But those haven’t materialised yet as the pricing benefit is not as significant as anticipated.
But, conceptually, it’s a great way, especially for the NBFC sector, to do a true sale of receivables into another entity and thereby raise a more competitively priced bond. Sean, have you guys been pitching that to others and how’s that going?
Sean Henderson, HSBC: We spoke a little bit on how to assess risk on the previous panel. If you’re relying on revenues and profits to repay your debt, then you’re looking at a corporate bond style transaction, while if you’re relying on the value of the underlying assets, then it’s more like an ABS deal. With a covered bond structure, you have the benefit of both, with recourse to the profits of the issuer, but if all goes wrong, you’ve got recourse to an underlying pool of assets.
Most investors can buy corporate bonds, but the tricky thing with an ABS structure, is you need experience in the product to understand the risks of the underlying assets, the nature and tenors of the cashflow, the integrity of the structuring and then the rating for it all to make sense. It’s a lot more complicated and so the investor base is often more specialist in nature.
I think Shriram was a great case study in terms of proving ABS was doable, and available as an issuance strategy. The challenge of replicating though, is that a lot of NBFCs have different types of assets and tenors in their loans portfolio. Also, regarding pricing, there’s been relatively limited pricing benefit from improving the ratings from BB to BBB, particularly given the strong underlying market. The benefit of doing all that structuring work kind of diminishes in a market like we have now, but fundamentally it proved that the technology, the credit story and the credit enhancement works.
I really do like the idea of a covered bond though, because as we’ve seen in the international bank markets, it captures the ratings benefits of the cover pool, but with the additional layer of offering recourse to the broader corporate credit profile too. If you can turn a BB rated credit into an investment-grade credit by giving an additional layer of credit enhancement, then you should be able to capture a wider range of investment grade investors.
I think the concepts all hold water, but we’re not going to see a flood of issuance because of these complexities on the structuring side.
Diwakar Vijayvergia, AllianceBernstein: This is a very new structure for Asian investors.. And when you know that the deal size is going to be close to about US$300m, which may or may not go into the index. I think, practically speaking, it actually is a very high bar for a lot of investors to look into the detail and do that kind of work. They might as well just buy the Shriram BB deal at 6.5%
But I do agree that these kinds of deals are necessary for our markets to develop and grow. We all worry that Asian credit is not growing, but if you don’t let these deals come into the market, the market is never going to grow.
So these deals are supportive for the growth of the market. I was told that Shriram was going to do multiple issuances of a similar type of deal. Given that they have an asset behind them which they can continue to churn because they do this onshore every month, it would be very easy for them to replicate this deal. But unfortunately, so far the follow-through has not happened.
Amit Singh, Linklaters: I think you’re both right. Because the markets are so good right now frankly, if there’s not that much of a cost saving for Shriram, then why should they even bother going forward with this trade?
And we’ve not even explored all the other regulatory issues there was. We actually had to get a formal exemption from the strict risk retention rules because the risk retention is actually at the India level. As opposed to what you’re technically supposed to do, which is risk retention at the dollar level. So all of that heartache without much of a cost saving, it’s not worth it.
Sean Henderson, HSBC: You make a good point on the technicalities of the investor base, because some investors couldn’t buy it simply because they didn’t have a specialist ABS portfolio to put it into. I think the technology works, but specific investor mandates need to be factored in too. That’s another reason why I like the covered bond idea, because it will capture both the ABS and corporate buyer base and allow them to put it into their investment-grade corporate portfolios. But then you need to make sure that you’re getting an appropriate pricing benefit for the additional credit enhancement you’re offering.
The other interesting opportunity that securitisation technology opens up, is that it could allow clients to grow a consumer finance business, and then refinance the assets into the capital markets. It can potentially be very helpful for an economy to have different pools of institutional capital coming in to drive growth in this way. There were lots of elements of the Shriram trade that we really liked, but it has yet to be copied as much as we would have hoped.
Amit Singh, Linklaters: It was a very good, intellectually interesting trade and really a first of its kind. Pretty much like the first orphan structure in 2016. One would very much hope that more of these come. Let’s wait and see.
Diwakar Vijayvergia, AllianceBernstein: I hope we see more such issuances from not just Shriram but others as well. That’s how the depth and breadth of the market will improve. Indian renewables is a great example. When the sector first started issuing there was some reluctance from investors but as the market continued to grow, it has become sone of the larger sectors in the index.
IFR Asia: Nitin, how is liquidity in the Indian domestic market?
Nitin Soni, Fitch: Overall, Indian corporate issuance is about 20% to 25% of the US$2.5trn bond market with government and state securities dominating, with about 9% to 10% compounded annual growth rate.
In terms of investors, I think RBI has done a lot to increase the base of investors. For example, banks now have to invest about 23% of their deposits in Indian corporate bonds, which will provide a lot of money supply. But regarding liquidity, these are not very liquid bonds in terms of traded volume.
Most of these bonds are held to maturity. And some 95% of these bonds are still done as a private placement rather than as public issuances where retail can also participate. Although I think the Securities and Exchange Board of India has lowered the minimum amount in which retail investors can invest in a public bond to about US$100 now. It used to be a much larger amount.
There are now bond platforms where retail investors can invest in bonds. So there have been a lot of initiatives. But I think the point is these markets are still very illiquid. It’s very difficult to sell these bonds if something goes wrong and most of the investors are still holding them as held-to-maturity.
IFR Asia: Sean, do you see signs that the onshore market is becoming a bit more sophisticated and does the development of GIFT City have any impact?
Sean Henderson, HSBC: We shouldn’t underestimate the importance of India’s demographics. You’ve got a very large population and a fast growing economy, so savings are building up onshore, and those savings are making their way into mutual funds which then need to be invested. So it’s an underlying structural growth in the market, and that growth is pushing investors to buy more credit, and to be a bit more innovative in terms of the tenors and structures they will look it.
Currently, it’s still largely a AAA/AA domestic rating focused market. There isn’t a really deep corporate credit culture, but that is changing, and liquidity is getting better. Having said that, it’s still not a broadly syndicated market, and you don’t get 300 investors in a book as you might in a dollar deal. You’ve got around a dozen big funds, plus some banks, so it’s more of a club style market, but it’s still a long way from where it was a few years ago. For example, when the dollar rates rose in 2023, we were doing relatively large deals in rupees for some of the renewable energy companies, and then buying back their dollar deals because the pricing differential made it more effective for them to refinance onshore.
To my mind, GIFT City is looking to address some of the withholding tax challenges in the financing markets. For example, in the loan market, some banks were lending from their offshore branches because clients were asking them to do this on the back of the withholding taxes, and so regulators were questioning why they were letting all of that business go?
Although lending from GIFT City is treated as if it were from an offshore branch, it’s in effect trying to recapture some of that business back into India. Likewise, from a listing perspective, if you list in GIFT City you reduce your withholding tax without needing to go an offshore exchange.
I agree that it would be ideal if GIFT City could become a listing centre for orphan SPVs. There’s a lot of potential for the framework to be further developed in this way, and GIFT City is an important part of making the markets more efficient, but it’s not fundamentally going to change investor liquidity because that’s more of a structural question of investor demand, rather than a withholding tax question.
IFR Asia: Diwakar, are foreign investors becoming more comfortable with Indian onshore corporate bonds? We saw the big rush into government bonds after index inclusion. How close are we to getting that acceptance for corporate bonds?
Diwakar Vijayvergia, AllianceBernstein: It took a long time for foreign investors to get comfortable with Indian government bonds. So corporate bonds is a story which is going to take few years at least to become a credible asset class for foreign investors. I think index inclusion obviously helped Indian government bonds in terms of foreign investors. But there were challenges. And there are still challenges in terms of how you access taxation, settlement, and FX.
The corporate bond market is something which we actively look at because we have the expertise. But the depth of the market is not there and it’s not easy to execute a transaction of any meaningful size. You could buy it in the primary, but the fact is that if you have to sell, the liquidity is not great.
The second challenge is if you look at the number of onshore issuers, apart from the government-owned entities, it’s pretty much the same names which are in the offshore market.
So if I have access only to those names which already have a dollar bond issuance, why will I actually go into the domestic corporate bond market?
Index inclusion definitely got many foreigners to buy the Indian government bonds. So much so that domestic institutions got crowded out of the trade.
IFR Asia: Amit, sitting here as an observer in Singapore, it seems like the Indian insolvency regime has improved a lot over the years. Has it, in practice, become more investor-friendly or creditor-friendly?
Amit Singh, Linklaters: I was actually at a private credit conference in Bali and a lot of the investors there were saying, “There’s much to learn from what India has done,” in terms of the insolvency regime and the certainty that’s come about it.
I certainly think it has been a big step forward in terms of getting investors more comfortable with the overall Indian credit story. Apart from the fact that obviously, everything else is panning out for India. Stable government, growth, companies doing better and looking overseas – what we’ve seen over the last few years is not just Indian issuers issuing from India, but you’ve had Wipro, HCL and JSW Steel issuing from their US subsidiaries with a guarantee. It’s been really heartening to see all of that over the last few years, and I expect that trend to continue.
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