Abundant liquidity available across the globe, fresh allocations at the beginning of the year and a fall in the US treasury yields have helped bring down the cost of borrowing via foreign currency bonds out of India. It is evident from the barrage of bond issuances in the first few weeks of January. For instance, Power Finance Corporation (PFC) had raised 10-year money via foreign currency (FCY) bonds in 2019 at a spread of 242.50 basis points with a coupon of 4.5%. However, the firm was able to issue similar tenor bonds last week at a spread of just 227.50 basis points over the corresponding US treasury yield at a coupon of 3.95%.
Shriram Transport Finance, which had raised funds via 3.5-year paper at a coupon of 5.95% last year, was able to raise money at just 5.10% this year through a similar tenor paper. Sunil Khaitan, India head, global capital markets at Bank of America, pointed out that most central banks have kept their taps on liquidity open, and hence there is a continuous hunt for yield across the globe.
"Indian issuers fit very well in the global portfolios as the quality of credit, at a certain point in credit curve, is significantly better than what investors see in China or other emerging markets. Spreads have come off as liquidity is high and investors are looking to aggressively deploy capital - flows into US fixed income funds remain elevated with $12.1 billion in the third week of January (fifth largest on record) and $13.6 billion in the first week of January (third largest on record)," Khaitan explained.
The pricing of a bond is a combination of the yield on the corresponding benchmark bonds and the spread that the issuer’s paper gets. Other conditions remaining stable, a drop in benchmark yield helps bring down the cost of issuing paper. It is noteworthy that US treasury yields have come down significantly compared to last year. On Thursday, the 10-year US treasury yield was trading at 1.73% - 106 basis points down from the highs seen in January 2019.
Foreign investors’ enthusiasm to pick up FCY bonds out of India is evident from the fact that in the first few weeks of January Indian entities raised close to $3.5 billion from the overseas bond market. ReNew Power, Exim Bank, Manappuram Finance, Shriram Transport, Future Retail and Power Finance Corporation were the issuers that tapped the FCY bond market this year.
Aditya Bagree, head, Asia local currency credit trading at Citibank India, said a benign rate outlook and abundant liquidity globally are driving demand for FCY bonds. "Fresh allocations which investors receive in the new year are helping drive the momentum in secondary spread. India credits also provide diversification for G3 APAC bond investors as APAC issuance is heavily skewed towards Chinese issuers with almost 80% market share."
Foreign currency bond issuances out of India had hit a record high in 2019, crossing the $21 billion-mark for the first time ever. The previous high was recorded in 2014 at around $18 billion.