Delhi International Airport Ltd (Dial) priced a well-received, debut dollar-denominated bond on Tuesday that demonstrates the current strength of secondary market momentum in Asia's high yield sector.
The Ba1/BB-rated issuer completed a seven-year Reg S deal at par with a coupon and re-offer yield of 6.125%, raising $288.75 million. This was the tight end of revised guidance, which started off around the 6.5% level and was then narrowed to 6.125% to 6.25%.
The deal attracted a large $5 billion order book, with 350 accounts, of which Asia accounted for 70%, Europe 27% and offshore US 3%. By investor type, funds took 67%, banks 17% and pension/insurance funds the remaining 16%.
Such a large order book was in part driven by the deal's attractive pricing relative to comparable Indian borrowers, but also by positive underlying sentiment towards both the country on a macro level and the wider Asian credit universe.
India consistently delivers less primary market supply than China and its government recently surprised the market by delivering a 25bp policy rate cut. The country is also one of the region's main beneficiaries of falling oil prices, which should help to narrow its perennial trade deficit.
Where Dial's new bond is concerned, observers said investors closely benchmarked it against BB-rated Tata Steel's 5.95% 2024 bond. This was trading around the 5.7% level on Tuesday.
Tata Steel also has a 4.85% 2020 bond outstanding, which was trading around the 4.3% level. This implies fair value for a new Tata Steel seven-year around the 5% level, taking into account a 40bp differential on the curve between its 2020 and 2024 bonds.
Dial has priced 112.5bp back from this level mainly because it does not have Tata's brand name and capital markets track record. There is also the issue of its parent's previous loan covenant breaches relating to the termination of a contract to run the Maldives international airport.
Bankers say fair value for Dial's new deal lies around the 5.5% level, implying plenty of secondary market upside potential from its 6.125% pricing level.
The GMR Infrastructure-owned group had initially floated the idea of issuing out to 10-years with a prospective yield in the mid to high 6% range. But this was not particularly well received by Asian high yield investors, who tend to prefer shorter-dated deals with less duration risk.
Dial's pricing does not look as attractive relative to JSW Steel's 4.75% 2019 bond, which is trading around the 5.8% level. The similarly rated group has only offered 32.5bp over JSW Steel for a three extension along the curve.
However, Ba1-rated JSW Steel put in a barnstorming performance last week, with spreads tightening 60bp from January 16 to January 23. Most other Indian corporates came in about 20bp to 25bp.
An investment grade credit in the making?
Investors who purchased Dial's new bond will be hoping the group can lift itself one notch to investment grade status and secure a roughly 200bp re-rating towards Indian Oil's trading levels. Indeed, one of Dial's main selling points was the group's proxy sovereign status since the Airports Authority of India (AAI) owns a 26% stake.
In its ratings release, Moody's said it was assuming a low level of government support in its baseline assumption. But the government clearly has a vested interest in making sure the airport continues to expand and thrive, not least because analysts estimate it could add 0.7% to GDP through to 2020.
Other shareholders comprise the GRM group on 54%, plus two foreign investors, which each have a 10% stake - Fraport, which owns Frankfurt Airport and Malaysia Airports.
Moody's added that upside ratings momentum would be generated by interest coverage ratios, which stay above two times on a sustained basis. From 2012 through to 2014, the group has steadily improved these from 0.3 times to 1.7 times and finally to 2.4 times for the 2014 Financial Year.
At the same time, debt to Ebitda has dropped from 37.7 times to 5.9 times and finally 4.9 times in FY 2014. As of FY14, total debt stood at $1.054 billion.
Future earnings growth is likely to be propelled by an increase in non-aeronautical revenues as passenger volumes rise and the group develops a 230-acre commercial site surrounding the airport. Currently, 66.7% of revenues are derived from aeronautical revenues, mainly landing fees.
From 2006 to 2014, passenger numbers grew by a compound annual growth rate (CAGR) of 12% and cargo volumes by 6%. From 2014 through to 2017, the group told investors it is estimating a CAGR of 9.8% in passenger growth and is targeting 68 million passengers by 2020.
But Standard & Poor's believes the group's financial profile could come under pressure over the next couple of years once a second regulatory period comes into effect and also flags regulatory delays as a second potential risk factor. "The Airports Economic Regulatory Authority is likely to significantly cut tariffs as per the principals of the first tariff order effective April 1 2015," it wrote.
Dial was awarded a 30-year concession to run India's largest airport in 2006 and has an option to extend this for a further 30 years.
Global co-ordinators for the bond deal were Citigroup and Standard Chartered, with HSBC and JP Morgan on joint books.