HDFC is set to become the first Indian corporate to issue a rupee-denominated, offshore, five-year bond in early January, raising up to $300 million in the process, the head of the financial conglomerate has said. But bankers warn concerns over liquidity and withholding taxes will dampen foreign investor appetite for the nascent asset class.
Speaking exclusively to Euromoney in Mumbai, Keki Mistry, HDFC’s vice-chairman and CEO, says the original ambition had been to list the country’s first so-called ‘masala’ bond in London by the end of the year. But he admits that with the US Federal Reserve almost certain to raise interest rates on December 16, and with the holiday period looming in Europe and North America, a print before 2015 “may be a challenge”. He adds: “It’s much more likely to happen in January.”
In late October HDFC – whose services span mortgage lending, asset management and insurance – became the first non-bank institution to secure approval to issue a masala bond, the equivalent of China’s dim sum bonds. Hopes were high that it would raise $750 million in its first foreign foray, the maximum permitted in any calendar year under Reserve Bank of India rules. But Mistry says the group would seek to kickstart the market with a more modest issuance. “My sense is that as a first tranche, $250 million or $300 million at the most, is more like it.”
Mistry says the non-deal roadshow, which included just shy of 30 investor meetings in three cities on two continents, spanning a period of three-and-a-half days, had been “a success”. Meetings kicked off on November 17 in Singapore before moving to Hong Kong and then wrapping up later in London on November 26/27. Barclays, Citigroup, Credit Suisse, HSBC and JPMorgan are involved in the sale.
“There was no prospectus,” Mistry says. “We just wanted to explain HDFC’s credit, which is well understood overseas. Most of those [participating in the roadshow] were major fixed income investors, and their big question was liquidity. Masala bonds are a new instrument, and they wanted to know how quickly liquidity would build, and how easy it would be to sell in the secondary market. The answer is that the liquidity will rise quickly if the instrument proves attractive enough.”
A banker involved in the Asia leg of the roadshow notes: “Liquidity is one of the major sticking points as of now. Only a large stock of issuance will address those questions. Investors right now don’t know how liquid the market will be two weeks or two months after the first [corporate] issuance. New markets always take time to develop.”
Then there’s pricing. Issuers have grumbled about New Delhi’s determination to slap a 5% withholding tax on all masala prints, a cost to be born by borrowers. Pointing to the levy, Mistry only says: “We would not like to have to pay any more than we have to”.
Some bankers wonder whether the tax would crimp interest in the new asset class or not. “It’s unhelpful,” says one Mumbai-based banker. “It would be nice, given that they are trying to encourage issuance, if the government could reduce or even waive the tax.” Yet that seems unlikely. New Delhi is making a calculated bet that, tax or no tax, enough global institutional investors without a licence to buy and sell onshore Indian debt securities, will want to participate.
While no final guidance on pricing has emerged, and with issuance limited for now to five-year debt, issuers are expected to print in the 7.7% to 8.1% range, which takes into account the 5% withholding tax. That would bring final pricing in line with onshore bond yields. HDFC, which is rated triple-A in India, can currently raise five-year money in Mumbai at around 8.3%.
New Delhi clearly wants the masala bond market to succeed. Indian premier Narendra Modi talked up the potential for the instrument during a state visit to London in mid-November; investors hope the market will be worth $5 billion in 2016 alone. A deep, liquid masala bond market is also a big first step in the direction of creating a more globalized rupee, which follows in the footsteps of China, whose currency, the renminbi, was recently admitted into the IMF’s elite basket of global reserve currencies.
To HDFC and the dozen or so Indian corporates that have secured approval to issue masala bonds, including telecoms giant Bharti Airtel, Indian Railway Finance Corporation and state power producer NTPC, the aim is simpler: to source fresh investment capital from a new pool of eager foreign institutions. “The reason we are doing [the issuance] is in order to reach new investors around the world,” says Mistry.
For now Indian banks are banned from printing masala bonds, though they can continue to issue non-rupee debt overseas. ICICI Bank, the country’s largest private-sector bank by assets, raised $500 million in August, selling five-year debt at a coupon of 3.125%, its first dollar bond sale in 2015. Only multilaterals have so far successfully issued masala bonds, with both the International Finance Corporation and the Asian Development Bank issuing pioneering five-year prints over the past 13 months.
HDFC’s Mistry says the feedback from the roadshow has been “very good”. Investors, he adds, have bought in to India’s growth story. In its latest World Economic Outlook, published October 2015, the IMF projected India’s economy to expand by 7.3% in 2015 and by 7.5% in 2016. Lower oil prices have proved a boon to the energy-poor economy, helping to suppress inflation, trim the current account deficit and boost expectations of further interest rate cuts in the new year.
“I’ve been meeting investors since the late 1980s, and in all those years, I haven’t seen India’s macro environment looking as healthy as it does today,” says Mistry.
Such a positive outlook is only likely to boost demand for masala debt, say issuers, investors and bankers.