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Masala bond debuts delayed in India as exotic nature means higher costs

Investors and issuers are still seeking common ground on masala bonds after RBI in September allowed sales to help wean companies off foreign debt and provide financing for Narendra Modi’s $1 trillion wishlist of infrastructure projects. Photo: BloombergPremium
Investors and issuers are still seeking common ground on masala bonds after RBI in September allowed sales to help wean companies off foreign debt and provide financing for Narendra Modi’s $1 trillion wishlist of infrastructure projects. Photo: Bloomberg

Not one local firm has offered the notes as investors demand premiums to address liquidity and currency risks

Mumbai: India’s masala bonds are proving a tad exotic for global investors and issuers are reluctant to pay a premium to borrow in rupee overseas.

Not one local firm has offered the notes, named after spices found in Indian curries, as investors demand premiums to address liquidity and currency risks. Housing Development Finance Corp. Ltd (HDFC), India’s largest mortgage lender, and NTPC Ltd, the biggest electricity generator, have yet to price debt after meeting potential buyers more than a month ago.

Investors and issuers are still seeking common ground on masalas after India’s central bank in September allowed sales to help wean companies off foreign debt and provide financing for Prime Minister Narendra Modi’s $1 trillion wishlist of infrastructure projects. Potential overseas investors are demanding as much as 15 basis points more than onshore notes, while this week’s Chinese turmoil looks set to add further delays to issuance.

“Pricing for masala bonds needs to factor a new issue premium, which is akin to any new paper issued in overseas markets in US dollars or any other denomination," said Ajay Marwaha, director for investments at Sun Global Investments Ltd in London. “Investors and issuers need to do more homework and understand each others’ perspectives better before this market becomes a success."

It’s getting cheaper to stay local. The cost of selling onshore bonds has dropped for a second straight year, with yields on five-year corporate notes rated AAA by Crisil Ltd falling 28 basis points to 8.4% in 2015, data compiled by Bloomberg show. Issuance was 4.03 trillion in 2015, just short of the previous year’s record 4.08 trillion.

Bonds issued in local currencies overseas, such as China’s Dim Sums, are often favoured by funds reluctant to venture into unknown markets, allowing issuers to obtain lower borrowing costs. Indian firms considering such offerings include Indian Railway Finance Corp., Power Finance Corp. and India Infrastructure Finance Co., who have sought bank arrangers for masalas.

International Finance Corp., the funding arm of the World Bank, sold a 170 crore masala bond in November, adding to more than 10,000 crore it’s offered since an inaugural sale in November 2013.

With bankers and investors still returning from holidays, China-led volatility in the global markets and blackout periods for local companies ahead of quarterly results, the launch of any local masala issuance will be delayed by “a few weeks", according to Barclays Plc.

“Issuers and bankers are evaluating windows of opportunity," said Rakesh Garg, the Mumbai-based head for global finance at the lender’s local unit.

Rajan roulette

They may have their work cut out. Foreigners bought a net $7.6 billion of rupee-denominated government and corporate bonds last year, down from a record $26.3 billion in 2014, according to Securities and Exchange Board of India (Sebi) data.

International bond sales by Indian borrowers touched a five-year low of $9 billion last year as central bank governor Raghuram Rajan warned companies that borrowing in US dollars was akin to “Russian roulette." That compared with a record $19.2 billion in 2014, according to data compiled by Bloomberg.

Masalas will reduce issuers’ dependence on local investors and help them reach a wider base of international buyers, according to Ajay Manglunia, head of fixed income at Edelweiss Financial Services Ltd. Foreign investors that can’t purchase rupee debt in India for regulatory reasons will also benefit, he said.

“This market will take off when expectations between investors and issuers match," said Rajiv Datt, New Delhi-based managing director at Indian Railway Finance, the funding unit for the state-owned rail network. Datt sees hope for masala issuance as “there are classes of investors willing to invest" in such debt. Bloomberg

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