It is a landmark but it may not tell us too much about the future of this market. This is because the deal appears to have been an opportunistic play on rates and foreign exchange rather than one based on the fundamentals either of credit or the market itself.
Terence Chia, managing director and Apac
“We did roadshows for issuers back in November, and the feedback was there was a pricing mismatch between issuers and investors,” says Terence Chia, managing director and Apac head of debt syndicate at Credit Suisse, one of the bookrunners on the deal alongside Axis and Nomura. “Investors were initially sceptical about the product: they were concerned about liquidity so wanted a significant premium. Issuers, on the other hand, didn’t see the need to pay up for masala issuance when they could get the same thing done onshore, though smaller.”
“With HDFC, we got interest from investors who were looking to buy and hold the bonds for the long term and hence were less concerned about liquidity,” says someone close to the deal. The RBI’s rule change cutting the minimum tenor of issues from five years to three also helped with liquidity concerns.
That is a valid trade, but does not suggest a flood of issuers. “Liquidity may still be an issue for investors who are looking to trade the bonds,” Chia says. “If they are thinking about that, they may be less inclined to buy a masala bond. At the moment these bonds are going to appeal much more to buy-and-hold investors.”
He says the HDFC deal has generated a lot of interest among other potential issuers – many of whom roadshowed late last year – but the ones who can get deals away are likely to be quite selective.
“HDFC is a very blue-chip credit,” he says. “Since investors don’t have any issues with the credit, they can focus their risk management on rates and FX. But if a single-B or double-B issuer tried to come out with a masala bond there would be a credit element in addition. At the very least, that’s going to make it more complex to manage the risk.”
In that respect, the lessons of the dim sum bond market may be illustrative. In its early days, high-yield issuers jumped in, with the nadir being a single B-rated solar panel company called LDK Solar, which ended up not being able to repay when the bonds were due for redemption. New local currency bond markets these days have to aim for a higher standard.