Record high: Foreign investors lap up corporate bonds worth $19 bn in 2014

Mumbai: In a record high, foreign investors have purchased Indian debt securities worth $19 billion this year, which marked a 20 percent jump from the previous year and even saw the so-called 'junk' bonds being lapped up aggressively despite poor corporate and sovereign ratings.

Junk bond is colloquially used for a high-yield or non-investment grade bond. These bonds are generally
fixed-income instruments that carry a lower rating and are called so because of their higher default risk in comparison to the investment-grade securities.

The year passing-by has seen international investors buying junk bonds worth at over $5 billion issued by Indian entities, as companies had to look overseas to raise funds for their working capital needs and also to retire their existing costly loans including those raised domestically.

Across all investment grade categories, the Indian companies and banks mopped up a record high amount of $19 billion in 2014 -- led by corporate giant Reliance Industries that grossed up a hefty $3.3 billion in forex debt.

The interest in forex debt received a further fillip due to the rupee funds remaining costly for the third year in a row.

On the flipside, the spike in forex fund raising spree has taken the nation's external debt to a little more than a quarter of its GDP at over $500 billion.

Investment bankers see more activity in the debt market in the first quarter of 2015 on indication by the US central bank of a rate hike April onwards.

The forex fund raising had risen by a much sharper 60 percent in 2013 to $15 billion.

As per the market data, the coupon rates on forex bonds varied from a low of 3.25 percent for SBI to over 8.75 percent for junk bonds from companies like Motherson Sumi and Rolta during 2014.

India Inc raised these dollar money for working capital needs as also to retire high cost rupee debts. Among others, the diversified Essar Group and telecom major Bharti Airtel raised over $5 billion to pare their costly rupee loans.

On an average, companies make a clean saving of 6 percent in financing cost, according to investment bankers who attributed the massive spike in forex borrowing to the elevated debt servicing cost in the country apart from fearing higher interest rates, following the US Fed hints of jacking up interest rates by early 2015.

They also give the credit to improved investor sentiments after a new government led by Prime Minister Narendra Modi came to power after a decisive victory in general elections earlier this year.

Deutsche Bank India's Corporate Finance Head Amit Bordia said that 2014 has been a record year for offshore debt issues with an aggregate amount of $18.6 billion till date.

"The year was characterised by emergence of high yield with $5.5 billion getting priced across 13 bonds," he said.

Deutsche Bank topped the chart in debt sales with a fee income of 10.3 million and a market share of 15.9 percent, while unseating Stanchart from the top.

Bordia said that the higher demand due to the overall euphoria around the Modi government and the resultant positive investor sentiment for India resulted in tighter spreads and greater acceptance of Indian credit.

This was also clear in a marked shift in investor sentiments towards Indian paper and the resultant sharp contraction in spreads.

Bordia said he is bullish on 2015 and sees more investment grade and junk bond sales coming in as the economy improves and the capital markets return to normal in line with global macro.

Barclays India' managing director and head of global finances Rakesh Garg also said that 2015 looks promising as we expect increased supply from Indian corporate and banks.

Barclays was involved in 13 deals with a market share of 7.75 percent earning a little over 6 million in fee income in 2014.

Garg said that a whopping 80 percent of this money was raised by financial sector companies and only remainder was by corporates.

RBS India's Head of Debt Capital Markets Manmohan Singh said that domestic companies will be getting better pricing going forward and more issuers will hit the market.

"The companies, which were unable to do so in past due to high pricing, can look at capital market issuance now," he added.

From the issuers side, RIL led the charts with $3.3 billion, while ONGC/OVL raised around $3 billion and State Bank of India garnered $1.25 billion. Tata Steel also raised $1.5 billion.

RIL's fund raising spree is interesting given as it is sitting on the largest cash pile among all Indian companies with over Rs 84,000 crore. Still, it is the most prolific borrower with its total debt outstanding at over Rs 1.3 trillion as of the July-September quarter.

RIL is mopping up cheap forex debt to part fund its Rs 1.8-trillion capex plan for the next three years. Between 2012 and 2014, RIL raised close to $10 billion through foreign currency loans and bonds.

In 2013 it made history by becoming the first Asian company to issue $800 million perpetual bonds to global investors at a coupon rate of 5.875 percent.

An interesting feature of this year's fund raising was an unprecedented interest in junk bonds from the country, which hit a record $5.5 billion this year from 13 issuers.

Other issuers include Tata Steel ($1.5 billion) IFCL ($1.5 billion), ONGC Videsh ($2.3 billion to fund its Mozambique oil and gas block acquisition), Oil India ($1 billion), Power Finance Corporation ($700 million), Rural Electrification Corporation ($1 billion), BoB ($ 750 million), IRFC ($500 million), ICICI Bank, Exim Bank, Axis Bank, IDBI Bank, and HDFC Bank among others.

High yielding bond is a euphemism for sub-investment grade or junk bonds, and they were sold at coupon rates ranging from 4.25 percent (Motherson Sumi's $685 million bonds) to 8.85 percent (Rolta) on maturity. Others who sold junk bonds include GreenKo, Global Cloud Xchange, IL&FS arm ITNL Offshore, Tata Motors ($300 million).


Updated Date: Dec 24, 2014 14:16:03 IST