Indian issuers took advantage of strong momentum in the offshore credit markets on Wednesday, with new international deals by auto parts manufacturer Samvardhana Motherson Automotive Systems and government-owned power company, NTPC.
Motherson completed an opportunistic tap of its recent dollar-denominated issue, while NTPC added a dash of green flavouring to the nascent Masala bond market with the sector's first environmentally-friendly bond.
The latter’s Rs20 billion ($300 million) issue represented only the second ever publicly-syndicated Masala deal since mortgage lender Housing Development Financing Corp (HDFC) created a new market for offshore rupee-denominated debt three weeks ago.
NTPC built on HDFC's success by introducing a longer tenor, more investors and a new exchange to list its bonds on — although the group did not achieve the same level of demand as its predecessor.
NTPC achieved an order book of around Rs29 billion compared to the roughly Rs86 billion HDFC generated for its Rs30 billion deal. But while placement of HDFC's three-year deal was highly concentrated among 40 accounts, syndicate bankers noted that NTPC's five-year deal was more widely distributed, getting demand from about 60 accounts.
"A number of potential investors sat on the sidelines when HDFC came to market because they were worried there'd be no secondary market liquidity," said one banker. "However, quite a few banks have committed to make a market in Masala debt and investors have now seen how well HDFC's traded, which encouraged them to come in."
The secondary bid for HDFC's Masala bond was apparent on Wednesday. Since it launched, the deal has traded up from an issue price of 99.24% to 100.55%, equating to a yield of 7.8% compared to 8.163% at launch.
NTPC's Masala deal was priced at 99.575% on an annual coupon of 7.375% to yield 7.48%.
The Baa2/BBB-/BBB- rated transaction had originally been marketed around the 7.5% to 7.6% level before indicative pricing was tightened to 2bp either side of 7.5%. That pricing was clearly enough to tempt investors: the issue size was doubled from an expected issue amount of Rs10 billion.
The bonds will be listed in both London and Singapore. By contrast, HDFC's bonds are solely listed in London.
One other difference between the two deals concerns the treatment of capital gains tax. Bankers explained that because NTPC issued its deal off a global MTN programme it had to incorporate provisions concerning a potential 10% to 40% capital gains tax payment if the Indian tax authorities deem the Masala bonds to be located onshore.
"But no tax authority has ever done this," one syndicate banker commented.
Onshore versus offshore
At the time of pricing, NTPC's 8.33% February 2021 onshore bond was trading on a mid-yield of 7.54%. Like it offshore equivalent, it pays an annual coupon.
Syndicate bankers said they used this bond as the main comparable since it is the most liquid bond on the 2021 part of the curve.
On the surface, it appears that NTPC has priced its offshore bond 6bp inside of its onshore levels. But the issuer had to take into account the 5% withholding tax the Indian government applies to offshore bonds and this meant the real cost was 20bp over onshore levels.
Syndicate bankers estimated that a new onshore bond would price around the 7.6% level based on current secondary levels.
Foreign investors have reaped a double benefit since they are not liable for the onshore tax, which would bring their real yield down to the 7.22% level. On this basis, the offshore bond has priced 26bp wider than the onshore bond.
Syndicate bankers said that 70% of the new Masala offering went to Asian investors and the remaining 30% to Europe, with a smattering to Middle Eastern accounts. Some 80% of the deal was sold to funds, and there was no dedicated green bond fund investment.
The most noticeable difference between the distribution of HDFC’s and NTPC's bonds is the larger portion NTPC has allocated to Europe, since HDFC only placed 14% across the continent.
Bankers said NTPC achieved higher European demand thanks to participation by investors sitting on hedge funds’ macro and rates desks.
"We'd normally try to minimise allocations to hedge funds given they buy deals to trade," said one syndicate banker. "But in this case we didn't because they buy and hold local currency bonds."
"These investors have mandates to buy Indian Public Sector Undertaking (PSU) bonds so we’re optimistic there'll be a thriving market for quasi-sovereign issuers," the banker added. "However, it has to be said there aren't that many triple-A rated PSUs out there."
Whether more corporate issues like HDFC will be willing to pay up to diversity their investor base offshore remains open to question. But there is no doubt the offshore market offers greater issue sizes than onshore where Rs5 billion to Rs10 billion transactions prevail. It also offers the chance to sell to those investors who do not have a domestic license.
That said, syndicate bankers estimated that many of the investors that participated in NTPC's Masala deal are able to buy bonds onshore and offshore. They said investors are currently bullish on India for two reasons.
Firstly, emerging market debt has been on a roll following the United Kingdom's vote to leave the European Union.
Secondly, India has been on an even bigger roll after the hawkish Reserve Bank of India governor, Raghuram Rajan, announced he would step down in June. Market participants believe his successor is more likely to cut rates.
As a result, onshore yields have fallen over the past few months. For example, NTPC's 8.84% October 2022 bond has risen from a year-to-date low of 102.63% at the beginning of March to a current cash price of 107.21%. Similarly a 9.64% May 2021 Power Grid Corp bond has risen from 104.83% in early March to 108.37% on Wednesday.
The Indian rupee is up 1.27% so far this year. That is an important consideration for investors, since they will receive principal and coupon payments in rupees not dollars.
The obvious landmark aspect of NTPC’s Masala deal is the fact it is also a green bond. NTPC says it will use up to 80% of the bond proceeds to fund solar projects and the remaining 20% for wind projects. The 69.74% government-owned entity is targeting 10,000MW of renewable energy projects by 2022.
The group has also continued the recent trend for Indian issuers to get full certification covering their use of proceeds. In this case, KPMG provided the assurance report and the London-based Climate Bond Initiative (CBI) issued its CBI certificate for NTPC’s green bond framework.
Debut green bond issuers from India such as Exim Bank and Yes Bank tried to save money by dispensing with certification reports, but the CBI says they have both committed to get them for their next green bonds, while IDBI is currently getting certification post-facto.
Recent deals by Axis Bank and Hero were certified at the time and CBI notes that a forthcoming green bond by Greenko will also be certified. The independent energy company began roadshows for a debut Reg S/144a green bond on Wednesday under the lead of Deutsche Bank, Investec, JP Morgan, Morgan Stanley and UBS.
Although much depends on the pricing, Greenko's deal looks likely to do well thanks to its majority ownership by Government of Singapore Investment Corp (GIC), which owns 72.58%. The Abu Dhabi Investment Authority owns a further 15.31% and Greenko Ventures the remaining 12.11%.
Auto parts manufacturer Motherson also returned to the international bond markets on Wednesday with a $100 million re-opening of its 4.875% December 2021 bond.
The group completed the original $300 million deal in mid-June and bankers said its return was an opportunistic play on recent strong momentum for deals such as Glenmark Pharmaceuticals and Adani Transmission.
In June, Motherson achieved a peak order book of $1.4 billion. This time round it built up peak demand of $400 million and final demand of $300 million. This was more than enough to cover the trade, but the drop off may indicate that markets are on the turn after a couple of very strong months.
The lower level of demand for the tap was also probably a function of pricing inside secondary market levels.
At the time of pricing, the group's outstanding bond was bid on a cash price of 101.75%. The new deal has been priced at 101.875% to yield 4.4%.
A total of 60 accounts participated of which 81% came from Asia and 19% from Europe. By investor type, funds took 63%, private banks 6% and banks 31%.
Syndicate bankers benchmarked their achievement against a second tap in the market on Wednesday by Indonesian property company Lippo Karawachi. It re-opened its $150 million 7% April 2022 deal at 103.75% compared to a secondary market bid price of 103.875%.
Syndicate bankers noted that market conditions were softening across the board on Wednesday, although sales desks flagged better two ways flows in Indian bonds compared to Chinese debt.
As a result, Motherson's existing BB+ rated deal traded down from an opening price of 102.25% during Asia's morning.
"The heat does look like it's coming out of the market," said one banker. "It's not really that surprising after such a strong run and it's not just happening in Asia either."
"In the US, issuers were offering a new issue premium of 7bp on Tuesday compared to 4bp on Monday," the banker added. "National Grid also had to widen indicative pricing for the 30-year tranche of a new $1.2 billion by its US subsidiary."
Barclays, HSBC and Standard Chartered were the joint global co-ordinators for Motherson's tap.