The Bonds Of Bond Market

If you were to look at cross-border bond offerings out of India, two names would stand out (and no, we are not talking issuers here, but the banks which hawk them to investors) — Citigroup and Bank of America-Merrill Lynch (BankAm-ML). Sure, there are others that are permanent fixtures on Bloomberg’s league tables in this segment, but for their sheer quality plus volumes and number of deals executed, Citi and BankAm-ML were jointly awarded the Cross-Border Bond Dealmakers of the Year in the BW I-banking Survey 2016.

What’s The Story?
In these roiled times, the popular notion is that “India credit” may not be hot with investors, but the India narrative is still investment worthy.

Says Neville Fernandes, head of Debt Capital Markets (capital markets origination) at Citigroup: “India is one of the fastest growing economy globally… India today offers better value to global investors with a lower risk profile, resulting in an overweight position for India versus other emerging markets or BRIC nations.” It’s a view seconded by Asit Bhatia, managing director - Global Corporate & Investment Banking at BankAm-ML: “The India story is intact and better than emerging market peers. It’s the quality of Indian paper that will decide investor response.”

Between them, Citi and BankAm-ML took some of the biggest names in India Inc to the global bond market. If you look at the profile of the offerings they sold to investors, you would see no particular pattern; the profile cuts across industries — Bharti Airtel (10-year, $1 billion), multiple offerings from Reliance Industries (10-year, $1 billion; 30-year, $750 million), Adani Ports (15-year, $650 million), Bharat Petroleum (15-year, $500 million), ICICI Bank (15-year, $500 million) and Exim Bank of India (two offerings of 15 years, $500 million).

Does BankAm-ML take the offerings of only those clients with whom it has a relationship with (or can it be a one-off transaction driven)? “We have a strong focus on deepening relationships with clients who we know well so that the clients we want to bank with can experience the power of our global franchise,” says Bhatia. It’s another way of saying that the bank is selective! He does not agree with the tendency to see India Inc as over-leveraged: “If you say Indian companies are over-leveraged, you are painting everybody with the same brush which is not necessarily true. There are some sectors which surely are, but even within those sectors there are some smart companies that are not.”

The Plot Ahead
At the secular level, Standard & Poor’s (S&P) feels Indian cross-border debt issuance (loans and bonds) has the potential to cross the $25-billion mark over the next few years. It will be driven by an increase in companies’ foreign currency funding needs due to a rise in capital expenditure; and a shift in eligible foreign currency funding from bank financing to the international bond markets. The latter aspect may well be a reality given the fact that a few large state-run banks — large providers of debt — have capital adequacy constraints due to which they can’t lend (or do as in the past); or have hit exposure ceilings in specific industries or firms. On its part, Moody’s says another window on the bond side is “masala bonds”. On 29 September, the Reserve Bank of India relaxed norms for rupee denominated overseas bonds – within the broad external commercial borrowing framework.

Going ahead, Fernandes says “continued focus on affirmative and coordinated policy action by the government will help unlock bottlenecks and lead to demand for growth-related capex. We believe these positive actions will lead to higher issuances going forward”. Adds Bhatia: “As reforms gather pace and the investment cycle picks up, cross-border bond issuances will gather momentum. There will be appetite for quality names.”

Some bonds die hard.