India set for new sovereign proxy

Last Updated: Fri, Aug 03, 2012 11:40 hrs

* IIFCL could extend dollar curve to 30 years

* Benchmark may create new funding avenue for local companies

* Dollar market more liquid and deeper in the long end

By Manju Dalal

Aug 3 (IFR) - India is poised to offer global investors the closest thing yet to a long-dated sovereign bond, in a move that will test international confidence in the country's long-term prospects.

Under instruction from the finance ministry, state-owned India Infrastructure Finance Company (IIFCL) has rekindled plans for a US$1bn Global MTN programme. The company last month asked bankers to make preparations for a long-term US dollar bond, with a tenor of 25 or even 30 years.

"We have met with the arrangers and the process of setting up the MTN will begin this month," an IIFCL official told IFR.

IIFCL's move comes at a time when India is facing intense pressure to restore confidence among international investors following a 25% slump in the rupee against the US dollar over the past 12 months. The government has so far resisted calls to sell overseas sovereign bonds to increase access to US dollars and prop up its currency, but a growing number of international fundraisings suggests that attitude may be changing.

Export Import Bank of India and State Bank of India have raised a combined US$1.75bn from five-year bonds in the past two weeks, illustrating that Indian debt still enjoys an enthusiastic following overseas.

IIFCL's planned 30-year maturity, however, would be the longest on any dollar bond from India's public sector.

The infrastructure lender made an unsuccessful attempt at an international deal three years ago, and had even set up an EMTN programme before adverse market conditions forced it to drop its fundraising plans. Now, however, the lender is reviving the idea with the same set of eight to nine arrangers, including Barclays, Credit Suisse, Deutsche Bank, HSBC and Standard Chartered.

This time around it will have to reckon with investors' concerns that India may lose its investment-grade credit rating, after Standard & Poor's put its outlook on negative watch earlier this year. IIFCL, which was set up in 2006, is rated BBB- with a negative outlook by S&P, in line with the sovereign.


IIFCL is eyeing long-term funds to match its long-term infrastructure loans and help finance India's yawning infrastructure deficit. A series of power cuts last week that affected as many as 600m people underlined the scale of the problem, with the shortage blamed largely on policy paralysis.

A long-dated benchmark, however, would also bring wider benefits to the local debt market, setting a reference point for other Indian issuers to use when they come to market and, potentially, saving them money.

Local interest rates are high, increasing the appeal of dollar funding for the companies allowed to borrow overseas.

Excluding hybrids, only three Indian issuers have sold dollar debt at 25 years or longer. Private sector conglomerate Reliance Industries launched a 30-year bond in 1996, and again in 2010, and even sold 100-year debt in 1997.

Reliance's bonds due 2040 were trading last week at 350bp over US Treasuries - a mark IIFCL may be able to beat if it gets an explicit government guarantee on the bonds.

Credit spreads are falling as investors return to Indian bonds. India Exim, which like IIFCL is 100% state-owned, paid 355bp over Treasuries for its USD500m five-year bond last week, creating the lowest coupon so far from India at this tenor. SBI (60% state-owned) printed a USD1.25bn five-year deal a week earlier at 375bp over.

On top of that, global appetite for long paper is running high as ultra-low short-term Treasury yields force investors to broaden their horizons in search of yield. China's Sinopec is among the Asian issuers that have taken advantage this year, with a 30-year bond in early May.

IIFCL in July launched 25-year and 30-year rupee bonds in the domestic market, the first public sector company to do so. The 9.36% coupon on the 30-year bond equates to around 320bp over Libor in US dollars, according to a DCM banker. That comparison may provide a realistic target for IIFCL in the international markets, but the conversion is not perfect, based on 10-year MIFOR in the absence of a 30-year quote.

Demand for long-dated paper remains weak in the domestic market, as IIFCL's experience last month proved. The company sold only Rs600m of 30-year bonds, making up a tiny fraction of an Rs11bn dual-tranche transaction.

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