Masala Bonds Still Bland for Indian Issuers as Caps Remain

Two months after suspending Masala bonds sales by local issuers, India on Friday lifted restrictions on issuance. That was the easy part. Masala bonds, or rupee-denominated debt securities sold abroad, are still subject to caps on pricing and tenor. Issuers must also compulsorily seek approval from the Reserve Bank of India before every sale, constraints that may keep issuance from picking up pace. “Waiting for a go-ahead from the RBI each time can be challenging as companies hit the market at an opportune time,” Umesh Revankar, managing director of Shriram Transport Finance Co., a financier of commercial vehicles, said in a phone interview. The company raised 13.5 billion rupees via such bonds earlier this year. Masala bonds will be treated as external commercial borrowings starting Oct. 3, the central bank said late Friday, removing them from the cap on foreign holdings in rupee company bonds after global funds exhausted almost all of the total limit of 2.44 trillion rupees ($38 billion). Companies are unlikely to “rush” with offerings of such securities, Revankar said.
The central bank in June imposed a price ceiling on Masala bonds and made it mandatory for issuers to sell notes maturing in at least five years if they raise more than $50 million. Next month, the market regulator halted sales after global holdings of rupee debt hit limit. Almost two-thirds of the 195 billion rupees raised since the first Masala sale by an Indian firm in July 2016 mature in less than five years, data compiled by Bloomberg show.
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The gap in pricing between the shorter tenor — for which there’s more demand — versus five years mandated by the central bank is another reason why companies may prefer to tap the domestic market, Shriram’s Revankar said. “The yield gap between pricing a three year paper over a five-year one could be as high as 50 basis points if a company raises money via Masala bonds,” he said. “Onshore, this could be about 15 basis points. Nobody would want to pay extra.”
The recent weakness in the rupee and an increase in government bond yields could concern investors, said Bharat Shettigar, head of Asia ex-China credit research at Standard Chartered Bank. He expects issuance to be limited to quasi-sovereign issuers in the near term. State-run Indian Renewable Energy Development Agency plans to raise $300 million selling five-year green Masala debt and is meeting investors in Hong Kong, Singapore and London this week. “The RBI circular just re-opens the Masala market,” said Revankar. “Companies would rather wait and watch.”

Source:Bloomberg