Bond Sales Freeze for Union Bank, IDBI Treasurers on Yields: India Credit

Corporate treasurers in India say they are delaying bond sales after U.S. President Barack Obama’s tax cuts and Europe’s sovereign debt crisis drove a benchmark for their global borrowing costs to a four-month high.

Rural Electrification Corp, the state-controlled lender to power projects, put off a $500 million bond sale until January on “adverse market conditions,” Finance Director Hari Das Khunteta said in a Dec. 3 interview. Union Bank of India is holding off on a Swiss franc debt offering, General Manager V.K. Khanna said in a Dec. 6 interview. IDBI Bank Ltd. will consider rates as it schedules $500 million of issuance in the first quarter of 2011.

“The money has to be at a reasonable cost,” Melwyn Rego, the Mumbai-based executive director and head of international banking at state-owned IDBI, said in a Dec. 6 interview. “If the costs are high, there won’t be any takers.”

Bond sales in foreign currencies has ground to a halt in December as Indian corporate dollar note yields rose to 5.12 percent, the highest level since July 29, HSBC Holdings Plc indexes show. The European Union’s bailout of Ireland and concern the U.S. budget deficit will expand helped damp demand for bonds from BRIC nations. The cost credit-default swaps tied to the debt of State Bank of India jumped to 179 basis points on Dec. 1 from 155 on Nov. 8.

Debt Offerings

Borrowers in India have raised $8.7 billion in 2010 through international debt offerings, according to data compiled by Bloomberg, short of the record $9.3 billion in 2007. They sold $2 billion in October and $2.2 billion in November.

“I am confident we will see issuances coming back,” said Philippe Petit, a senior investment manager in Singapore at Pictet Asset Management, said in a Dec. 10 interview. The firm manages $17 billion of emerging-market debt. “There is an appetite, definitely, in the market.”

The perceived creditworthiness of Indian banks has held up better than their peers in other emerging markets. Credit- default swaps on State Bank have fallen 45 basis points in the past six months to 172 on Dec. 9, compared with 20 basis points for Bank of China Ltd. and 28 basis points for Sberbank, Russia’s biggest lender. The swaps are used to protect against missed debt payments.

The yield on 10-year U.S. Treasuries touched 3.33 percent last week, the highest since June 4, after Obama agreed to extend U.S. tax cuts to boost growth. German bund yields rose above 3 percent for the first time in seven months.

Bond Buyback

India’s 10-year government bonds gained last week on speculation the central bank’s buyback of 120 billion rupees ($2.7 billion) of debt on Dec. 9 would ease a cash crunch. The yield on the 7.8 percent notes due in May 2020 fell 9 basis points to 8.08 percent.

Banks borrowed an average 816 billion rupees a day this quarter using the Reserve Bank of India’s repurchase-auction window, compared with 239 billion rupees in the previous three months, according to data compiled by Bloomberg.

“Investors are probably taking some comfort on expectation there will be more buybacks,” said Krishnamurthy Harihar, treasurer at FirstRand Ltd. in Mumbai.

The rate on emerging-market debt was 5.69 percent on Dec. 9, after reaching a three-month high of 5.74 percent on Nov. 30, according to an index compiled by JPMorgan Chase & Co. The yield fell to 5.123 percent on Nov. 4, the lowest since the bank started tracking the market in December 1997.

“The higher rates overseas lately don’t change the fact that it’s still cheaper to sell bonds compared with onshore costs,” Alice Chikara, a bond analyst at Elara Capital Plc in Singapore, said in an interview on Dec. 10. “We expect to see a strong pipeline of issuances next year.”

Borrowing Costs

India’s local-currency debt has returned 4.1 percent in 2010, according to indexes compiled by HSBC, as the Reserve Bank raised borrowing costs by 150 basis points. Investors in China earned 1.2 percent, the least in the region, the indexes show. Indian dollar bonds returned 9.6 percent, compared with 10.9 percent on average for dollar debt in Asia, HSBC data show.

The rupee has advanced 3.3 percent against the dollar in 2010, making it cheaper for local companies to borrow overseas. The currency appreciated 0.1 percent last week to 45.0550 per dollar amid a report showing the nation’s industrial output rose in October more than forecast.

Output at factories, utilities and mines rose 10.8 percent in October from a year earlier after a 4.4 percent increase in September, the statistics office said in a statement in New Delhi on Dec. 10. The median estimate of 29 economists in a Bloomberg News survey was for an 8.5 percent gain.

‘Far From Over’

The European Union and the International Monetary Fund agreed on an 85-billion euro ($113 billion) rescue package for Ireland on Nov. 28. IMF Managing Director Dominique Strauss-Kahn said in Geneva Dec. 8 that Europe remains in a “troubling” situation and the effects of the global financial turmoil are “far from over.”

Union Bank will sell bonds “as and when we find the pricing is right,” Khanna said. Rural Electrification’s Khunteta said the company is now “looking at the second week of January” to sell its bonds.

“Moving into next year, markets will be more volatile as the macro background is less conducive to strengthening in the bond markets,” Kenneth Akintewe, a Singapore-based portfolio manager at Aberdeen Asset Management Asia Ltd., which manages $261 billion in assets, said in an interview on Dec. 10. “From India’s perspective, you could see a little bit of delay.”