Issuers head offshore as local conditions tighten
Relaxed regulations and a dovish Fed score a record year for offshore activity
AS of October 2019, borrowers had raised US$18 billion offshore compared with US$6 billion in 2018 and US$15.7 billion in 2017. There are expectations that the number will reach US$20 billion to US$22 billion by end 2019, and some speculate it could hit the US$25 billion mark.
“I think it’s a given that a [funding] pipeline has been created,” Taranjit Jaswal, Barclays’ head of corporate banking, says during a panel discussion organized by The Asset in association with Fitch Ratings. “While 2018 was a dismal year, this year there are a lot of renewables and NBFCs [non-banking financial companies] coming in for the first time.”
And with the exception of a couple of big infrastructure groups, “a lot of the largest corporates haven’t tapped the bond market yet in 2019, but still it’s been a record year,” Jaswal notes. “The pipeline looks robust, and we’ll see a lot of momentum going into 2020.”
The record offshore activity has been spurred by a tight domestic credit market, in which only the top-rated issuers can easily borrow onshore, and by the Reserve Bank of India’s (RBI’s) recent revision of the external commercial borrowing (ECB) regulations.
The relaxed ECB rules opened the door to lower-cost external borrowing for many Indian companies by reducing the statutory maturity tenor, enlarging borrowing limits and, removing or simplifying eligibility requirements, including allowing all entities that receive foreign direct investment to raise ECBs.
Though the appetite of foreign investors for Indian corporates hasn’t been all encompassing, they seem to have a better outlook on Indian credits than their domestic counterparts. Vicky Melbourne, Fitch Ratings’ head of South and Southeast Asia industrials, finds a lot of US interest in Indian renewables, a high-yield space in which a lot of Chinese corporates dominate. “The key for offshore investors is that these Indian renewables bring diversity across their books.”
Sajal Kishore, Fitch Ratings’ head of APAC infrastructure, agrees, sharing that for US or European investors used to seeing Chinese property or LGFV [local government finance vehicle] issuers, “an Indian, Indonesian or even a Vietnamese bond would clearly be of interest to them. Plus, renewables are a sort of mantra with ESG, which also helps”.
In the Indian renewables space, there’s clearly a trend towards longer-dated bonds. “For the investor, you were seeing 5-year paper, but now you are seeing 20-year partially amortized paper,” Kishore adds. “Maybe, in the future, you will see a fully-amortized bond coming out.”
Even though Indian issuers have tripled their borrowings, they still only represent 6% or 7% of the overall China-dominated Asia-Pacific bond market, valued at between US$270 billion to US$280 billion as of early October.
“The biggest issues around the ECB guidelines are the average maturity and the all-in pricing,” Barclays’ Jaswal says. “And that usually restricts some of the double B and lower category guys from going offshore.”
“It’s always a toss-up between the relationship loans with the banks verses the bond market,” Kishore explains, with pricing being the key decider. However, with the offshore market currently very liquid, the US Federal Reserve likely to keep rates low for longer, and the European credits offering negative interest rates, he believes that more corporates will definitely look to the offshore bond markets much more aggressively than before.
Kishore and Melbourne see no systemic liquidity crisis at the top end of Indian corporates. However, Melbourne notes that “Indian home builders have been reliant on NBFIs [non-banking financial institutions] and certainly once that source dries up they are facing a significant liquidity [crunch] in terms of a lot of those onshore loans”.
She adds that even if there isn’t that much of a differential between doing a US dollar offshore bond and a cross-border issuance, hedging costs all in, there are advantages for corporates in going offshore, such as diversity of funding, creation of headroom in terms of their existing banking relationship down the track particularly as single borrower regulations tighten, and flexibility of tenor.
“The offshore markets do offer much more flexibility,” Sabyasachi Mukherjee, GMR Group’s head of treasury and debt, agrees. “For Indian infrastructure corporates, the choices in the domestic markets - even when the banks were active - are very few.” And the few onshore players - insurance companies and pension funds - have their own regulations restricting investment to assets rated double B or above. And, he adds, Indian mutual funds are only short- and medium-term players.
The challenge for Indian infrastructure corporates, Mukherjee argues, is to raise their asset’s level of preparedness and subsequently their rating, so that they are able to tap the markets outside India. The relaxed ECB guidelines, even though they have a hedging requirement and inherent minimum average tenor challenges, he notes, are encouraging infrastructure corporates to go offshore. “We [at GMR] want to take advantage of the new guidelines and see how we can tap that [market].”
Some argue the regulations could be relaxed even more to boost the number of issuers able to tap the offshore markets. Jaswal believes that removal of the regulations’ average maturity and all-in pricing hurdles, along with an allowance for reduced tenors, would - more than improving issuer preparedness - lead to many more outbound issuers, not only from the infrastructure sector, but from other sectors, such as retail or pharmaceuticals.
Successfully tapping the offshore market, in Kishore’s opinion, is largely asset specific, an interplay of regulations, asset quality, the rating level the asset aspires to, the growth drivers inherent in it, and, of course, its pricing framework.
Issuers in India, mirroring those across Asia, are heading offshore largely to refinance, with some capital expenditure involved, according to Jaswal. And they are using primarily Reg S, with 144A only for a select few.
To boost domestic conditions, the government has cut corporate tax rates in an attempt to nudge Indian corporates into ramping up investment and hopefully spurring growth. “[The tax cut] is a good move, but it will not have an immediate impact,” Mukherjee shares.
Jaswal, on the basis of client feedback, hears that the cuts have benefited the retail sector allowing them to retain employees and invest. “These companies are probably more positive than those in the manufacturing sector.” In contrast, Fitch Ratings, according to Melbourne, isn’t anticipating any significant investment from Indian corporates as a result of the cuts.
Along with the tax cuts, the RBI has been on an interest slashing spree, cutting rates five times already this year in an attempt to make loans cheaper and revive the onshore credit market, but without much effect.
GDP growth slowed for the fifth straight quarter hitting 5% for April-June. Demand is low. Credit is tight. The banks are risk adverse, while the NBFCs are in crisis, on life-support or bucking up their balance sheets. Most infrastructure projects are already being financed abroad. And so, issuers other than the top-rated ones look set to continue dipping into the available liquidity offshore in 2020.