Masala bonds gain traction for cheap capital

Companies in need of funds are tapping the overseas markets; they raised ~501 crore in August via this route

As the country unlocks gradually, companies in need of funds are tapping the overseas markets by issuing masala bonds (or rupee-denominated bonds).

In August, there were eight such masala bond issuances, raising ~501 crore, showed the data released by the Reserve Bank of India.

The amount may seem minuscule, but its importance becomes palpable when it is found that companies have not issued a single masala bond in the overseas market since March.

In February, companies, including Mahindra & Mahindra Financial Services (~350 crore), had raised ~626 crore. In January, Schneider Electric India raised ~4,500 crore.

However, Indian companies continued to raise external commercial borrowings in foreign currencies even during lockdown. For instance, companies raised $2.15 billion in July.

The resumption of masala bonds could be for various reasons, say bond dealers. It could be a genuine need of local companies, which find overseas rates cheaper than onshore bank loans. This argument is at least true for lower rated firms that don’t enjoy market access in India. Investors in India tend to buy bonds of well-rated firms.

However, it could also be that banks are now done with deploying funds raised under long-term repo operations (LTRO), or targeted LTRO (TLTRO), and hence, companies are being forced to tap overseas markets for rupee bonds, say bond dealers.

“Masala bonds have few takers overseas because of the relative rarity of rupee as a currency on foreign shores,” said Joydeep Sen, consultant, fixed income at Phillipcapital, adding, “When companies try to issue rupee bonds, large investors subscribe to these bonds because they can get direct exposure to the rupee without registering onshore.”

Masala bonds are denominated in rupee, but are settled in dollar or other foreign currencies.

The issuer is protected from currency fluctuations, while any gain or loss on currencies is borne by the investors of these bonds.

As the economy normalises, there will be more such issuances, say bond dealers. While interest rates here have come down to a decadal low, the overseas rates are even lower.

Since there is no need to hedge a masala bond, smaller companies will continue to find it as a convenient route to raise resources.