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18 | ifr special report | September 2009 DOMESTIC DEBT

Indian bond markets step up

The Indian rupee bond market has done well to become a viable alternative for capital- starved corporates looking for new funding avenues with the closure of offshore debt markets. Issuance volumes have been strong this year and the issuer base has widened significantly. However, this growth phase is set to be stunted amid a continuing lack of depth because of a limited investor base and tight regulations.


ntil July 2009, issuance touched Rs992bn (US$20.3bn) from 334 issues versus 787 rupee debt issues totalling Rs1.61trn in the whole of

2008, according to Prime Database. With the current issuance momentum, bankers are expecting 2009 volumes to overtake easily that of 2008 for a new record. “The reason behind the robust onshore volumes is simple,” said Kaustubh Kulkarni, director (capital markets), Standard Chartered Bank. “Indian issuers were hungry for capital, but they had no choice but to look to deals at home rather than overseas. Offshore markets, with the advent of a global recessionary phase and a near meltdown in the financial sector, had turned risk averse. International banks and institutional investors were ready to take on Indian debt exposure only if they were paid a huge risk premium.” In light of this changed lending or

investing mindset, Indian corporates looking to fund working capital requirements or refinance debt had to approach their domestic relationships and pay coupon levels that were more amenable for the Indian institutional investor base. At first, such an option proved to be expensive compared to what corporates had gotten used to paying for offshore debt. For example, when Reliance Industries – after a six-year absence from the domestic market – publicly issued Rs10bn of five-year non-convertible debentures via Axis Bank in November 2008, it paid an annualised coupon of 11.45% for the rupee debt – a huge premium over a syndicated five-year US$1.2bn bullet loan it had done just recently offshore.

The loan then paid 151bp over Libor, and the fully hedged rupee cost of that loan worked out to roughly 7%. Simply put, the company had then paid a huge 445bp premium over its offshore loan. Issuers always paid a spread for onshore funding vis-à-vis offshore debt, but that

spread used to be comfortably within the 50bp–100bp range.

But top Indian corporate names had no choice. They had to pay up to raise funds from the local debt markets. At the time, corporates explored a variety of funding modes including rupee loans, commercial paper and medium to long-tenor rupee bonds.

Thanks to regulatory measures in early 2009 that injected significant liquidity into the system, interest rates eased and the onshore debt markets started looking less expensive. Immediately the rush of Indian corporate paper issuance intensified and many, which had not visited the rupee debt markets for years, returned. The question then was only whether they should look at rupee debt or the local bank market for funds. The bond markets saw more action backed by some fundamental reasons in its favour. “As corporate borrowers are becoming larger and building sophisticated treasuries, they are better utilising the bond versus loan trade-off – the bond usually achieves cheaper pricing, diversifies investor base, is easier to hedge using interest rate derivatives while it does not allow prepayments and has “negative carry” (a loan can be tied up today for disbursement after six months when the funds are actually required whereas the bond has to be borrowed as soon as terms are finalised),” said Shameek Ray, director at ICICI Securities.

The surge in issuance volumes saw the emergence of some innovative issuance. In May, Tata Motors used a bank-guaranteed bond to refinance a US$3bn 12-month acquisition bridge. The automaker raised Rs42bn through a multi-tranche rupee bond that came bundled with a credit enhancement in the form of a standby letter of credit from the State Bank of India (SBI). Tata Motors certainly benefited from the SBI-guaranteed bond. The company raised much-needed cash just ahead of a US$2bn refinancing of its bridge loan that funded the acquisition of

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