Dollar bond rush seen unabated even as returns drop
Dollar bonds issued by Indian companies posted their lowest return this year in September.
Indian issuers look set to keep tapping the dollar bond market in the fourth quarter even after record issuance so far this year, as U.S. currency borrowing costs remain attractive and strains persist in rupee debt markets.
Investors have lapped up debt sales in 2019 from Indian issuers, which still account for less than 7% of offerings in the Asia ex-Japan market and offer diversification from Chinese deals. After significant tightening in India dollar spreads in 2019, however, investors in the fourth quarter can probably expect returns mainly from holding the notes and earning interest, according to Bharat Shettigar, head of Asia ex-China corporate credit research at Standard Chartered Bank.
“The pipeline is healthy and there will be continued issuance in October and November as all in yields in dollar are very attractive for issuers and domestic credit conditions remain tight,” Shettigar said. In the dollar market “spreads for Indian companies tightened because of investor demand, especially for high-yield names,” he said.
Tough borrowing conditions back home due to a deepening shadow bank crisis has pushed issuers overseas, and dollar bond sales are running to an all-time high of about $18 billion so far in 2019. While most Indian U.S. currency credit spreads have tightened this year, the recent slump in the bond prices of financier Indiabulls Housing Finance Ltd. and Yes Bank Ltd. highlight risks of investing in some Indian names tied to the domestic credit squeeze.
Dollar bonds issued by Indian companies posted their lowest return this year in September, but they still managed to avoid losses seen in Chinese and Indonesian notes in that period.
Bharti Airtel Ltd. and HPCL-Mittal Energy Ltd. are among Indian issuers mulling dollar note sales ahead, and state-run Power Finance Corp., the top issuer of offshore bonds this year, increased its global medium-term note program to $5 billion from $3 billion in September.
“There is strong interest in bonds that provide the much-needed diversification from this year’s abundant Chinese property developers and local government financing vehicles,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd., in an interview. “Indian paper is a key beneficiary, despite macro headwinds, as there is a mix of highly-rated state owned issuers and high-yield private-sector borrowers with global businesses.”
The sale amount of investment-grade Indian dollar bonds in 2020 could be similar to this year, but the outlook for junk notes is less clear due to the country’s slowing economic growth, said Krishnakumar S., director and lead analyst for corporate ratings, south Asia at S&P Global Ratings.
“High-yield issuance will depend on how India’s growth trajectory shapes up,” he said in an interview.