Moody’s upgrade boosts already growing confidence in Indian debt

Singapore/Mumbai: India’s sovereign rating upgrade by Moody’s is a shot in the arm for Indian companies looking to raise funds in offshore bond markets.

Driven by more attractive rates and relatively strong economic fundamentals among emerging markets, offshore dollar borrowing by Indian companies has already risen 32% from the start of 2017 to $8.81 billion, according to Reuters data.

The rating agency’s decision on Friday to raise India’s credit assessment for the first time in nearly 14 years to a notch higher than its rivals was perfect timing for billionaire Mukesh Ambani’s Reliance Industries Ltd, which announced plans to raise $800 million offshore just days before.

The upgrade to Baa2 from Baa3 lifted Indian stocks, bonds and currency and helped Reliance price its notes at 130 basis points (bps) over US Treasuries on Tuesday, the tightest ever spread for an Indian issue.

Other companies are assessing if the narrowing in Indian bonds yields over US Treasuries will last with a view to raising fresh funds, say bankers and corporate finance heads.

Markets have received the upgrade well, said Jujhar Singh, managing director and head of capital markets, South Asia at Standard Chartered Bank. “This should give further confidence to Indian corporates to raise dollar funds through the international bond markets at the tightest ever spread in the last 10 years,” he said.

Foreign investment in India’s domestic corporate debt has reached its ceiling under central bank-mandated limits, forcing those investors who want exposure to India to buy offshore. This had helped tighten spreads even before the upgrade.

State Bank of India 2024 bonds have come in to 120 bps over US Treasuries from 126 bps over just before the Moody’s upgrade and 147 bps over in early 2017.

Seshagiri Rao, joint managing director of India’s JSW Group, a steel-to-energy company, said the ratings upgrade could help JSW potentially save over $1 million annually on its borrowings.

Mahindra Group, which operates multiple businesses from autos to information technology, might tap offshore markets too, said finance head V.S. Parthasarathy, adding “a small one step upgrade by Moody’s is a big step up for India’s confidence.”

Attractive pricing

Companies, including quasi-sovereign issuers that had already begun work on raising funds offshore, such as Indian Railways Finance Corp and Power Finance Corp, are now speeding up the process, bankers said.

State-controlled Hindustan Petroleum Corp. Ltd, might explore raising funds offshore next year, chairman M.K. Surana said.

“Some institutional investors who are required to invest in investment-grade bonds might not have been willing to buy India dollar bonds in the past as the Baa3 credit rating did not give them psychological comfort margin in case of a downgrade,” said Ken Hu, a senior investment officer at Invesco.

The prior Baa3 rating was the lowest investment-grade level.

Lower-rated issuers could also benefit with some bankers estimating their borrowing costs could fall as much as 15 basis points in offshore dollar markets.

Still, Moody’s upgrade may not be enough to please all debt investors.

“India’s a good credit to have on the books for foreign investors,” said a senior investment banker, who declined to be named as he is not authorised to speak to media. “However, much bigger traction among investors will happen only if at least one more rating agency upgrades India.” Reuters