Masala bond issue ‘opens up the market’

The recent landmark issue by India’s Housing Development Finance Corp (HDFC) of a masala bond – a rupee (INR)-denominated bond in the overseas market – will open the market for other potential issuers, particularly non-bank finance companies (NBFCs) and government related issuers (GRIs), according to Moody’s Investors Service.

The credit ratings agency (CRA) says that last week’s issue is the first masala bond for a corporate entity, following issues by International Finance Corporation (IFC) and Asian Development Bank (ADB).

The 37-month dated masala bond, issued by HDFC on the London Stock Exchange (LSE), raised INR30bn (US$450m), with an annual yield of 8.33% and secured global investor support. The bond will help HDFC diversify its borrowing profile and access global investors.

Indian prime minister Narendra Modi announced plans for around US$1bn of masala bond issuance in the UK during his three-day visit to London last November.

“We expect the market to deepen further with more issuers following HDFC’s issuance,” said Alka Anbarasu, a Moody’s vice president and senior analyst.

“In addition, the INR has depreciated by about 5.3% on a year-on-year basis, allaying some investor concerns about emerging market currency risk at a time when financing conditions have become less favourable for many developing countries.”

Moody’s says that the development of the masala bond market will help Indian NBFCs diversify their funding sources, which is their key credit weakness as regulatory restrictions prevent them from accepting current and saving deposits. Companies are therefore reliant on expensive and less granular funding from wholesale markets and institutional investors.

Furthermore, the Indian regulator recently issued a discussion paper proposing new limits on banks’ lending to large corporates and NBFCs in order to reduce the system’s single-name concentrations.

Given that banks are a key source of funding for these entities, Moody’s believe that these proposed limitations could become a significant constraint on their balance sheet growth, unless these NBFCs and large corporates manage to find alternative funding sources.

In September 2015, the Reserve Bank of India (RBI), India’s central bank, issued guidelines allowing Indian corporates, NBFCs, real estate investment trusts (REITs) and infrastructure investment trusts to issue masala bonds. The bonds – although denominated in INR – are listed on the international market and offered and settled in US dollars, providing easier access for foreign investors.


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