Commercials back rupee-denominated borrowing: HSBC India's Amitabh Malhotra

High bond yields in the US have weighed on foreign currency borrowings this year. As interest rates in India have gone up by a lesser extent, the scenario is in favour of rupee-denominated borrowings, says Amitabh Malhotra, head-global banking, HSBC India. In an email interview with Samie Modak, Malhotra says among the key risks next year are dollar bonds worth $17 billion that are coming up for maturity. Edited excerpts:

We are nearing the end of 2023. How would you sum up the year when it comes to deal-making on the debt capital market (DCM) front?

The DCM has had a mixed year if we look at the onshore rupee bond market and the offshore foreign currency bond market separately. Significantly higher underlying risk-free rates, especially US Treasury rates, resulted in fewer foreign currency issuances by companies across Asia, including India, given access to alternative pools of capital. Primary issuance volume across Asian companies, excluding Japan, in G3 (US dollar, euro, and Japanese yen) bond markets is down 21 per cent in 2023 (versus last year). Similarly, primary issuance volume by Indian companies in the international bond market is also down 34 per cent. However, on the other hand, the onshore rupee-denominated bond market continues to be vibrant with primary issuance volume up by 41 per cent in 2023. This is driven by benign interest rates vis à vis US Treasuries, constant deepening of liquidity pools, and an increasing inclination of Indian companies to access this market, as well as other positive developments like India’s (proposed) inclusion in JP Morgan’s Government Bond Index-Emerging Markets (GBI-EM) index, which has helped boost significant inflows from foreign portfolio investors. HSBC has supported companies to retire their upcoming foreign currency bonds by raising liquidity from the onshore rupee bond market. Apart from these, activity in the private credit space is picking up, with huge inflows of liquidity now chasing deployment opportunities.

Were things relatively better on the equity capital market (ECM) side?

 When it comes to the ECM, H1CY23 saw fewer deal volumes. However, there were select windows in which high-quality names were involved, names like Mankind Pharma, Blackstone-Nexus REIT, and several secondary block transactions by financial investors. There was a marked increase in deal activity during the second half. Several promoters opportunistically monetised stakes through secondary blocks in the past few months. For 2023, aggregate India ECM volume stands at $19 billion with secondary blocks leading volumes at $10 billion. With the Indian markets being preferred by global funds and strong monthly inflows into local mutual funds, we expect deal momentum to continue.

What’s the ECM outlook for the next 12 months? Which sectors could dominate activity?

We believe that India will continue to see the supply of good quality paper over the next 12 months. There may be some moderation in fundraising activity during the general election window. However, we expect that period to be used by companies to complete the documentation and continue investor engagement activity in preparation for an eventual public market event. This will also mean that next year, too, transaction volumes are expected to be higher in the second half vis à vis the first. Key themes to look for will be banking and financial services, industrials & consumer, health care & pharma, real estate, and selectively new tech economy names.

Have multi-decade-high bond yields made domestic issuers averse to foreign borrowings? What are the dynamics at work?

Overall, interest rates in India have gone up to a lesser extent as compared to the sharp increase in the international bond markets, most notably in the US dollar bond market. Accordingly, commercials are today more stacked in favour of rupee-denominated borrowings after accounting for hedging costs and withholding taxes. Until the time this pricing gap remains, we expect this trend to continue. On the demand side though, while pricing has gone up in the international bond markets, they remain among the most liquid and offer deep liquidity pools to borrowers, including in India. Given growth concerns in some other geographies, India continues to be a bright spot for many global investors. As and when the pricing gap compresses, we do expect a sharp bounce back in activity in this market. When it comes to foreign currency-denominated loans, the difference in pricing is less stark and, in some cases, non-existent, and therefore the loan market has been quite active.

Given the challenging global environment, what realignments have issuers made to ensure successful deal-making?

Two points that stand out. First, the inherent strength of the business model of companies which have been able to sustain growth while not sacrificing profitability, which is a key differentiator. Second, companies that demonstrate a high degree of corporate governance, disclosures, and predictable track record. From a specific fundraising perspective, companies that are in a position of readiness and can take constructive feedback from anchor investors on valuations and price discovery and are nimble in decision-making will succeed, given tight launch windows.

What are the other challenges and risks, both global and domestic, that bankers and issuers will have to be mindful of?

As far as risks are concerned, dollar bonds worth $17 billion are coming up for maturity in 2024 and will need to be paid down or refinanced by Indian companies -- this is something that issuers and their bankers need to proactively work. At a broader level, we do not see any major challenges in the ability of Indian companies to refinance or pay down these maturing bonds, given well-diversified access to debt capital. The key risks continue to be inflation and geopolitical factors, which could lead to further rises in interest rates, including in India. Given cross-currency hedging rates, the borrowing cost in dollar terms would be significantly more for companies that do not have a natural hedge, and this indirectly reduces their market access.

How has HSBC fared this year on the league tables?
 

HSBC has been at the forefront of M&A deal activity this year, having announced four transactions in India across sectors, like power, renewables, and infrastructure. We continue to see a lot of capital flows across these sectors going forward, as well. In the DCM space, this year we are the number one G3 bond house in Asia ex-Japan region, and among the top three bond houses in the India G3 space. On the ECM side, HSBC was part of three of the five largest IPOs. Additionally, we were part of three marquee QIP transactions.