Indian banks have raised $3.55 billion via overseas bond issues in less than a month, after a lull of three to four months. In an interview with Parnika Sokhi and Abhineet Kumar, the managing director (debt capital markets), Bank of America-Merrill Lynch, D Saradhi Rajan, says the fall in Treasury yields and fresh investor interest from around the world helped revive the bond market for Indian issuers. Edited excerpts:
Why was there a spurt of foreign bond issuances after a gap?
India opened this year with bonds for Reliance Industries and then Axis Bank. After these issuances, there was a big hiatus until State Bank of India issued its dollar bond.
There was a high degree of investor discomfort on the bond side as to where the economy is going.
There was also an issue in terms of pricing, as spreads had widened quite a lot. Indian banks have healthy net interest margins and they should not damage that by issuing bonds at uneconomically higher spreads. We found that investors were not only asking the country’s largest lender about its business, but also about where the economy was going.
The fundamental health of corporate India remains strong and Indian banks’ balance sheets are also very strong. The India growth story is not as bad as it appears. Once people digested that story, you can see the evidence of how much they liked it by the size of the order book of SBI bonds, which was the largest ever for the bank.
But we have not seen any major bond issuance?
It is really the withholding tax that has kept corporate sector away. You have 20 per cent withholding tax for bonds, expect for infrastructure companies for whom it is five per cent. Now what we believe is that the government will change the rules for all companies because from the government’s perspective, they are not getting any tax as there are no issuances right now. So if they change rules, they will actually get five per cent at least.
Has the geographical spread of investors interested in Indian papers seen a change?
We always see the highest number of quality ‘long-only’ investors in the US — the deepest bond market in the world. But now we are seeing an increasing number of fund managers in Asia who are of extremely good quality. For example, 40 per cent of investors in bonds of ICICI Bank are from Asia. Also, for any Indian issuer, there is a significant amount of money from non-resident Indians.
Why such a shift?
The bond market in Asia has started growing now. Today, we have a big pool of quality papers available from India, Korea, Honk Kong .... Typically, the demand is in G3 currencies and particularly in dollars. So, the first thing that happens with weakness in the euro is that we see huge flow of cash trying to find a safe home in dollars. So, there has been a great inflow into dollars around the world, wherever they are based.
What is the trend that you have seen in the coupon rates?
When we did the ICICI Bank deal, the US Treasury rates had hit an all-time low and the reason was that people were rushing to find a safe home for their dollars. So, they were just buying the US government bonds and driving the rates down. So, even though the spreads may have widened due to uncertainty and volatility in the market, it is more than compensated by very low treasury rates.
Do you see more banks or companies going through the same route to raise funds?
For banks, it is driven by price and the use of funds. To the extent they find new loans to make at the right price that can protect their spreads, they will come back to the markets. There are probably few more issuances to come from the banks.
To make corporate bond issuances a routine thing, the government will have to bring down withholding tax.
