Indian bond issuances is expected to remain strong in the current calendar year, driven by country’s improving economic environment and still-benign global interest rates, said Moody’s Investors Service.
“We expect Indian companies with natural hedges against currency risk will lead the tally in bond issuance in 2015,” said Philipp Lotter, Moody’s managing director responsible for corporate ratings in India and ASEAN in a note on Tuesday. “At the same time, low oil prices and reduced subsidy burdens will reduce borrowing requirements of Indian oil and gas companies, which have been regular borrowers in the past,” Lotter added.
A recent Reserve Bank of India (RBI) circular reiterating spread and use of proceeds limitations on cross border borrowings of Indian issuers has raised questions amongst some investors about the compliance of recent bond deals. However, the rules have not changed and Moody’s thinks that the current uncertainty will subside quickly.
The lower interest rates on foreign-currency borrowings as compared with rupee-denominated borrowings also make it cheaper for companies with natural hedges against currency fluctuations to issue offshore bonds. Moody’s further notes the market could broaden if the cost of hedging declines, which Moody’s believes it will. “As the investment environment in India (Baa3 stable) improves, more issuers will raise funds to invest in projects within India rather than make acquisitions abroad,” said Moody’s.
Most offshore bonds issued by Indian companies provide investors with access to the cash generating onshore parent and subsidiaries through unconditional and irrevocable guarantees. Moody’s also expects further simplification of issuance structures as direct issuance from onshore Indian entities increase, as they take advantage of the lower withholding tax on interest payments to international investors.
Moody’s furthermore notes that Indian high-yield bond covenants score well on a global scale. Scored on a weighted average of six key risk areas, the bond deals have stronger covenant protections than those in other regions, including the US, Europe and the broader Asian region.
According to Moody’s Indian deals have more protections against cash or value leakage in terms of dividend payments to shareholders and making speculative investments, with fewer carve-outs as a percentage of total assets. In addition, Indian covenants have the strongest protection against debt incurrence by limiting the amount of debt available under debt carve-outs. However, Indian deals tend to have high initial liens subordination, which has resulted in a weaker average liens score as compared to the China average.