Ind-Ra: RBI's New 30-year Bond Issuance to Offer a Benchmark to Corporates for Long-Term Funding

The new 30-year government security (G-sec) bond issuance by Reserve Bank of India (RBI) on 19 June 2015 will fix structural issues for Indian issuers which are in need of long-term funding especially infrastructure projects, says India Ratings and Research (Ind-Ra).

As has been the global experience, a long-tenor government security facilitates setting a benchmark for other issuers such as banks, financial institutions and corporates to access long-term funding through capital markets. Lack of a benchmark has often been sighted as a shortcoming, which prevents Indian institutions from raising much required long-term funding from capital markets.

Infrastructure companies are typically unable to raise more than nine to 10-year funds, while their projects generally need 20-25 years of funding. Banks have significant loans in the 20-year plus category without sufficient similar tenored liabilities to balance it. The start of the longer dated bond issuances will bring maturity in the market and will push the market towards the longer end of the yield curve. One may not rule out capital market issuances by top rated Indian corporates and infrastructure projects/companies, however this is unlikely to happen in the initial phase of development of a long-dated fixed income market.

The benefit will be a trickle-down positive for government agencies such as Employee Provident Fund Organisation, pension funds, provident funds, life insurance companies among others as investors. These investors run maturity mismatches on asset side which can be met from these issuances. On the other hand, issuers such as public financial institutions, banks, public sector units, refinancing agencies such as India Infrastructure Finance Company Limited, National Housing Bank and Power Finance Corporation can use this as a benchmark to price longer dated debt in the 15 to 30-year bucket. This can be then used to lend at a fixed rate to infrastructure projects.

Corporates and infrastructure companies will be able to manage their liabilities better once longer tenured debt is made available. Financial ratios such as debt service coverage ratio and interest coverage ratios will look better for these companies too.

Ind-Ra believes foreign institutional investors such as pension funds, provident funds and insurance funds globally could be large investors since the yield is highly attractive compared with home countries in Europe and North America. However, this opportunity will remain limited due to a cap on their investment in debt market.

RBI may consider an interest rate reset clause at the end of 15 years to address interest rate risk. The reset can be based on 364-day T-bill plus spread basis.

Overall, Ind-Ra believes this is a step in the right direction for the development of the corporate bond market in India.

Figure 1
30-year Bond Yield (%) Outstanding (USDm) Sovereign Rating (Fitch)Brazil 5.70 3,550 BBBChina 4.10 3,055 A+Russia 6.35 1,500 BBB-India* 8.17 7,324 BBB- USA 3.06 29,362 AAAUK 2.70 11,171 AA+Germany 1.50 12,320 AAA*Refers to the 29-year bond
Source: Bloomberg Figure 2
FYE10 FYE11 FYE12 FYE13 FYE14 FYE15Less than 1 year 6.2 3.4 3.5 3.1 4.0 3.51-5 years 22.7 25.6 26.7 27.9 26.0 21.45-10 years 38.0 34.1 34.7 35.0 31.5 31.410-20 years 17.9 21.4 22.0 22.9 25.2 30.620 years and above 15.2 15.5 13.1 11.2 13.3 13.1Total 100.0 100.0 100.0 100.0 100.0 100.0Source: Ministry of Finance, GoI

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