Firms shelve $3 billion bond sales on fears of Fed hike
As market volatility spikes, firms such as JSW, Yes Bank have put their fund-raising plans on hold
Mumbai: Uncertainty around possible rate hikes by the US Federal Reserve and a consequent rise in volatility in the US bond market has led several Indian firms and financial institutions to shelve their overseas fund-raising plans.
Indian corporate bond issues worth over $3 billion have been shelved as firms wait on the sidelines, keeping a vigil on interest rates in the US.
For instance, JSW Steel Ltd has kept its $1 billion bond issue on hold for now. Similarly, Birla Carbon has also put its $500 million issue on the backburner.
Financial institutions which have withdrawn their plans at the moment include Axis Bank Ltd and Yes Bank Ltd. L&T Finance Holdings Ltd has also decided not to venture overseas at the moment for its planned masala bond issue.
A handful of power producers who were in the market to raise money through dollar bonds to meet expansion plans, too have put their plans on the backburner. Renewables firm Atria Power Corp. Ltd had plans to sell dollar bonds worth $500 million and had hired investment bankers for the process, Mint reported in April. The plans have been put on hold.
Mytrah Energy and Haldia Petrochemicals Ltd (HPL), a Kolkata-based petrochemicals producer, were planning to launch dollar bonds in the range of $300-500 million and were hiring investment bankers for the issuances, have put their plans on hold.
Yes Bank spokesperson declined to comment. Mails sent to other firms did not elicit any response.
In the last three years, the US central bank has raised interest rates six times. Consequently, the LIBOR (London Interbank Offer Rate) or the benchmark rate for pricing these bond issues has moved up significantly. In the last one year, 12-month LIBOR has risen from 1.7765 to 2.7803.
The Chicago Board Options Exchange’s SPX Volatility Index (Vix) has also been seeing sharp fluctuations. As on 3 March 2017, the index stood at 12.85% and went as high as 37.32% on 5 February 2018. It is currently hovering around 15.76%. The Vix is a barometer for measuring market uncertainty.
According to investment bankers, raising funds abroad is currently more expensive than raising money domestically.
According to M.S. Gopikrishnan, managing director and head of foreign exchange trading and financial markets sales for South Asia at Standard Chartered, for an investment grade paper maturing in five years, the overall cost of raising money, including the hedging cost, is around 9.6% as against 8.5% domestically. As on 2 May, the yields for benchmark 10-year G-sec stood at 7.74%.
According to Bloomberg data, Indian firms including financial institutions have raised around $3.3 billion so far during the current calendar year. During calendar year 2017, Indian firms together raised around $13 billion through dollar-denominated bonds.
“If you see the investment grade space, the spreads have widened by 40-50 basis points (bps) since January and for high yield paper that is below investment grade, they have moved up by 70-75 bps since then. This is primarily on account of uncertainty around Fed’s interest rate hikes. In addition, we have seen Chinese issuers flooding the market and are willing to pay a much higher coupon to push through their large requirement,” Gopikrishnan added.
One basis point is one-hundredth of a percentage point.
He further said it is unlikely that the spreads may tighten anytime soon considering the fact that everyone is holding a different view around rate action by the Fed.
“This seems to be the new normal. We will see a lot of these firms accessing bank funding which is also reflected in the recent upmove in marginal cost of funds based lending rate. Eventually, below investment grade issuers will have to accept and start borrowing at the new spreads in the overseas market,” Gopikrishnan said.
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