India Inc loses appetite for offshore debt

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Measures announced by the Reserve Bank of India to ease overseas corporate borrowing, including doubling the annual limit under the automatic route to $1.5 billion and raising the cap on the aggregate cost of Foreign debt, while welcome, won’t do much to boost the market in the near term, experts say.

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Decreasing appetite

The companies raised $6.4 billion from offshore bond sales in the six months to June 30, the lowest in four years.

Industry experts have said that the offshore bond market is virtually closed for emerging market issuers, particularly high-yield or so-called junk bond issuers, due to uncertainties surrounding rate hikes, and that is unlikely to open anytime soon.

Offshore bond markets have been very receptive to Indian issuers over the past three years, and several companies have tapped into the market to raise dollar debt at competitive rates. Indian companies raised $11.9 billion, $10.2 billion and $12.8 billion in the first six months of 2021, 2020 and 2019, respectively, according to data from financial markets tracker Refinitiv. Fundraising in 2022 was dominated by Reliance Industries, which raised $4 billion through foreign bonds in January.

“Both the risk appetite and the interest rate scenario have backfired on the market. So I don’t think we’ll see the market open up anytime soon,” said Pramod Kumar, managing director and head of investment banking at Barclays Bank India.

Given the current market environment, RBI’s decisions are likely to have a marginal impact on the corporate fundraising environment, added Arun Saigal, Managing Director and Head of Global Finance at Barclays Bank India.

“The recent slowdown in capital market issuance is primarily due to global market conditions, asset price corrections and redemptions that fund managers have seen in recent months. As a result, there has been a widening of spreads and a slowdown in new issuance. So in this scenario, the RBI measures will only impact margins, and we don’t expect too many issues to occur because of these measures in the short term until the market stabilizes,” he said.

“Additionally, given where prices are in international markets, for many Indian companies/issuers there are cheaper alternatives available in the INR market, and there is no pressure to seek access to foreign debt.”

Sameer Gupta, Head of India DCM (Debt Capital Markets) at Deutsche Bank, said functioning credit markets require risk appetite and a favorable rate environment, and currently both are very negative due to the tense geopolitical environment and one of the worst inflations. rounds.

“At the moment there is no respite as inflation prints are consistently high. So the concern is that central banks will have to keep raising rates. Primary debt capital markets are effectively closed as investors remain uncertain about the trajectory of forward rates and the consequent spillover of higher rates to the broader economic backdrop,” he said.

Gupta said the market is waiting to see when the interest rate environment turns benign.

“It’s hard to call. Markets will start to open once a pause or rate easing is expected…It will be sequential, with investment quality first followed by high yield,” he said.

Experts said rising U.S. interest rates and negative investor sentiment have pushed yields higher, making offshore debt an unattractive option for businesses today, especially when top-rated issuers can borrow in rupees locally at relatively cheaper rates.

To be sure, some experts believe that the RBI’s easing could provide respite for companies looking to tap offshore debt markets.

“Raising the limit on the automatic route would certainly make it easier. Actions on FCNR deposits demonstrate RBI’s intent. This will cause the currency to stabilize, which will be helpful,” said Ganeshan Murugaiyan, Head of Hedging and Corporate Advisory, BNP Paribas India.

However, he added that raising the all-in cost cap will not result in short-term issuance, as IG (investment grade) companies might not find it attractive to borrow at such high rates, but c is a good step in the long term. -term.

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