IDBI Bank's tight, well-executed transaction last Monday seemed like the perfect stage opener for a return of Indian issuers to the dollar market. Besides the deal's strong performance, the pipeline has got the tailwind of a string of Indian reforms announced last week, which investors hope will reduce the likelihood of a rating downgrade of the sovereign.
Recent turmoil over those announcements dampened the excitement somewhat but analysts said that as long as spreads remain compressed, new issues from India, especially banks, would trickle in. Plenty of Indian issuers normally tap the dollar market but it was a slow first half of the year with just US$2bn of deals booked. Only last month did activity pick up and Indian banks printed US$3.6bn of deals in just four weeks after State Bank of India reopened the sector.
The flurry was curtailed by the end of August as the rapid increase in supply prompted bonds to widen. But IDBI Bank printing a tight deal that performed well in secondary has set the stage for another spate of issuance by showing there still is strong investor appetite for more supply from the subcontinent.
Besides being well marketed, the deal got a boost from long-stalled reform measures that the government announced on September 14. Among the changes was an increase in prices of heavily subsidized diesel, the opening up of the supermarket sector to foreign chains, more foreign investment in airlines and broadcasters and the sale of stakes in four state-run industries.
The moves were aimed at reviving economic growth and staving off a downgrade to junk status. In June, Fitch Ratings cut its credit outlook for India's BBB- rating to negative from stable, after S&P made a similar move in April.
The measures brightened the mood but analysts said they did not avert the risk of a downgrade.
That risk was rekindled after one of the government's key allies withdrew support in opposition to these measures, reducing the administration to a minority and raising the risk that the government might fall before its term ends in 2014.
The ensuing turmoil prompted the rupee and Indian stocks to drop. Yet, Indian bonds actually tightened through the week, suggesting that Indian issuers could return to the dollar market once the turmoil subsides.
"The negative news about the coalition could put a bit of caution into further rally of spreads but I don't get a sense that the worry is to the extent that people would go back to pre reform announcement mindset yet," a Hong Kong based credit analyst said.
Besides, the credit rally that global banks embarking on more quantitative easing sparked has pushed credit spreads to considerable tights, including Indian credits. The five-year credit default spreads on State Bank of India, which is seen as a proxy for the sovereign, are around 260bp levels, compared with 406bp in mid-May. while the economic prospects for India have not materially changed over this period.
The IDBI Bank deal was priced at 370bp over US Treasuries, inside the 380bp where Indian Overseas Bank's (Baa3/BBB-) bonds maturing in February 2018 were trading or the 375bp over at which Union Bank's bonds maturing in August 2017 were trading. Even better, IDBI's new bonds were quoted on Thursday at 360bp-352bp over US Treasuries, IOB's 2018s were at 369bp/357bp and UBI's 2017s were at 363bp-350bp.
This means that despite all the movement in the foreign exchange and stock markets, there should be plenty of interest for other Indian deals. This is good news for Syndicate Bank, which is on the road meeting investors. Others may soon follow too. Bank of Baroda, Bank of India, UCO Bank, Allahabad Bank and Indian Bank are seen as potential candidates and as long as risk reigns, these issues could sail through.
The corporate sector may also join the party after the withholding tax on overseas borrowing of Indian companies was cut from 20% to 5% - a rule that was formally implemented this Friday.
However, if the political landscape in India deteriorates from here, the IDBI Bank deal could be the last one from the country in a while.