Indian groups favour foreign bond markets

A growing number of Indian companies and their affiliates are turning to the overseas bond markets to secure cheap funding at a time when high interest rates at home have made domestic fundraising less appealing.

In the past few weeks lender ICICI, miner Vedanta and Tata Motors’ Jaguar Land Rover car unit have raised more than $4bn in the overseas bond markets.

Bharti Airtel, India’s largest mobile phone operator by subscribers, has asked banks to co-ordinate an overseas bond of up to $1bn. Essar Steel is also believed to be eyeing the bond market as are a number of Indian lenders.

The companies have been encouraged to look overseas after Indian interest rates have risen nine times in the space of a year as Delhi seeks to curb high inflation.

According to figures from Dealogic, the data provider, $5.4bn has already been raised in the overseas sub-investment grade bond market by non-financial Indian companies so far this year, compared with $7.1bn for the whole of 2010.

“The foreign currency markets have started becoming more attractive given the significant rate hikes over the last year,” said Prakash Subramanian, managing director and regional head for capital markets in South Asia. “The foreign currency requirements by Indian corporates have increased and most of the leading Indian banks have been raising foreign currency funds in their offshore centres to cater to this demand.”

Last week Vedanta raised a bigger-than-expected $1.65bn following very strong demand from investors. The bond issue, one of the largest by a non-financial Indian company, was marketed through the US’s private “144a” market, which allows companies to place securities with a wide pool of professional investors or “qualified institutional buyers”. Rule 144a placings offer access to a more liquid market without all the constraints of a publicly marketed transaction.

Amit Sheopuri, co-head of Asia debt origination at Citigroup in Hong Kong, said he expected Indian issuers to be active in the dollar, yen and euro bond markets (the so-called “G3”) in 2011. He said financial institutions were looking to build their offshore balance sheets and businesses.

Indian companies, however, are likely to be selective about their bond issues given the regulatory and tax regimes associated with repatriating money back into the country.

“Subject to the local funding environment, we could see an increase in Indian corporates tapping the offshore G3 markets – both for their offshore and onshore requirements – given the liquidity and pricing efficiencies in the bond markets,” Mr Sheopuri said.

On a global basis India’s overseas corporate bond issuance is still relatively small. Global volumes have reached $499.3bn this year, up from $403.9bn for the same period last year. Asia, excluding Japan and Australia, totals $106.9bn in the year to date, up from the $90.6bn over the same period last year.

‪Vedanta’s high-yield offering was priced at 6.75 per cent for the five-year, $750m tranche, and at 8.25 per cent for the 10-year, $900m tranche. The issue was co-ordinated by Barclays Capital, Citi, Credit Suisse, Royal Bank of Scotland and Standard Chartered.

The offering will partly finance Vedanta’s acquisition of Cairn Energy’s Indian unit, a $9.6bn deal that is awaiting final approval from the Indian government.