RBI pricing cap hits India Inc’s junk bond issuance
MUMBAI: Offshore junk bond sales by Indian companies remain subdued thanks to an interest rate cap on foreign borrowings, discouraging overseas investors seeking higher returns. The result: Few issuers from India have raised dollar debt since March, even as foreign investors flush with liquidity pile into Indian stock markets.
Only four companies—REC Ltd, UPL Ltd, Adani Ports and Vedanta Resources—have tapped the dollar bond market after March when Covid-19 upended markets. Except for Vedanta, the other three companies have an investment grade rating (above BBB-). In the same period, companies across sectors have raised around ₹1 lakh crore from equity capital markets, including Reliance Industries Ltd, HDFC Ltd, ICICI Bank, Axis Bank, Mindspace Business Parks REIT.
“What’s constraining the Indian issuers from raising dollar bonds is the pricing cap that is applicable for borrowings under the external commercial borrowings (ECB) route, where issuers can’t pay beyond LIBOR (London Inter-bank Offered Rate) plus 450 basis points (bps). Given the overall macro environment and the yields available in the secondary markets, investors want the appropriate returns for the risk that they are taking,” said Arun Saigal, managing director and head of debt capital markets, Barclays Bank India.
“If RBI were to relax the pricing cap by even 150bps, one would see a significant increase in the volume of bond issuances by Indian companies,” he added.
According to investment bankers, the muted activity is not due to a lack of interest in low-rated papers.
“In comparison to the domestic market where investor appetite in credit has largely been limited to the AAA and AA space, investors in the offshore market have the appetite for Indian paper across the risk spectrum,” said Saigal.
A key factor that forced many Indian issuers out of RBI’s pricing cap was the rise in yields in the secondary markets following the pandemic outbreak.
“When Covid-19 happened, in the initial period, the yields widened significantly. A lot of the Indian papers saw yields widen by 300-400bps. In March and April, there were very few issuers who could have raised bonds within the regulatory caps,” said Ganeshan Murugaiyan, managing director and head of investment banking at BNP Paribas India.
EVEN A 150 BPS RELAXATION IN THE PRICING CAP BY RBI WOULD SEE A SIGNIFICANT INCREASE IN THE VOLUME OF INDIAN BOND ISSUANCES