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Photo: iStock
Photo: iStock

Junk bonds may not find takers for now

Of the $10.2 billion total offshore bond issuance this year, investment-grade issuers have raised just $3.9 billion

More than two months after the coronavirus pandemic shut all economic activity, offshore bond markets have begun opening up for Indian issuers, but junk bond sellers will have to wait.

Indian firms have aggressively tapped offshore bond markets this year, raising more than $10 billion so far, showed data from financial markets tracker Refinitiv. Most of this was raised before the pandemic hit. Last year was equally busy, with Indian firms raising $20.7 billion, the most in six years, through offshore bond sales.

In March, though, only one Indian company—real estate developer Macrotech Developers—managed to tap the bond market. However, in the past month, two firms—state-owned lender REC Ltd and agrochemicals major UPL Ltd—raised $500 million each overseas.

“The offshore bond market is opening up for Indian firms. Spreads in the secondary market have narrowed considerably in the last few weeks. We could see some more investment grade issuers, including PSU firms, try to tap the markets in the next couple of months. The recent UPL deal will spur others to look at the offshore debt market," said Anuj Kapoor, managing director and head of investment banking at UBS.

Yet, experts said in the near term only investment-grade bond issuers will be able to tap the market, and sub-investment grade bonds or junk bonds will have to wait for a broader recovery in risk appetite. Junk bonds refer to bonds rated below BBB minus.

“When the Asian markets opened, it was the investment-grade, big regional brand names and the sovereigns that started to tap the market. The Asian high yield issuance has been very quiet so far. On an average, 25-30% of issuances in any week tend to be high-yield issuers in a normal market. But in these markets, that number is 5-10%," said Shantanu Sahai, managing director and head of debt at Nomura India.

A large part of the offshore bond sales from India in the last 18 months was from sub-investment grade issuers. In 2019, investment grade issuers raised $10.8 billion out of the total $20.7 billion raised by Indian companies.

Of the $10.2 billion total offshore bond issuance this year, investment grade issuers have raised only $3.9 billion. “If you extrapolate from the Chinese high-yield deals, it will probably be possible for the larger high-yield Indian names to come to the market first, which would be companies in the BB rating bucket and those that are from defensive sectors," said Sahai.

“Newer issuers or names that are lower down on the credit curve, say B-rated bucket, those will need to see some more broadening of investor risk appetite," he said, adding that new issuers and those in B-rated bucket might have to wait till August or September to tap the markets.

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