New guidelines on offshore rupee bonds will put the brakes on the growth of the Masala bond market, according to debt bankers.
The Reserve Bank of India last Wednesday brought the Masala bond market in line with existing rules on external commercial borrowings in other currencies. As a result, Masala bonds must have a minimum original maturity of three years, rising to at least five years for deals over $50 million, and coupon rates must be no more than 300 basis points over the government curve.
The changes temper earlier efforts to stimulate the growth of the offshore rupee market, which allows Indian companies to borrow overseas without taking currency risk, and have not gone down well with market participants.
“The central bank is clipping the wings when the market was just starting to take off,” said a fixed income trader from a foreign bank.
In the past three months, Housing Development Finance Corporation, National Highways Authority of India and power generation company NTPC have all sold Masala bonds, raising interest in the format.
While NHAI and NTPC sold five-year debt, the three-year tenor has been popular for non-banking finance companies such as HDFC, Shriram Transport Finance and Indiabulls Housing Finance.
RETROGRADE STEP
“The new guidelines will affect the plans for housing finance companies which were keen on raising Masala bonds above $50 million for three years,” said another DCM banker.
Most bankers feel the move will stall a market that was already struggling to gain traction.
“It is a retrograde step for sure; it will kill the Masala market further,” said an executive director from a foreign bank. "It will de facto rule out credit [corporate] borrowers, non-sovereign and non-quasi-sovereign issuers.”
The RBI said that the all-in-cost ceiling for Masala bonds will be set at 300bp over the prevailing yield of the government securities of corresponding maturity, in line with ECB rules.
None of the major Masala offerings have yet crossed that threshold, but some smaller private placements had offered higher yields, according to two DCM bankers.
RBI said that the Foreign Exchange Department will examine all proposed Masala issues in future. The central bank also said that investors should not be related to the issuer, raising questions over some innovative structures that had allowed Indian companies to access the global high-yield bond market.
For example, ReNew Power Ventures in February sold Masala bonds to a Mauritius-based funding vehicle, Neerg Energy, which used the notes as collateral for a $475 million offshore bond.
However, not all agree that the new RBI guidelines will have a negative impact on the Masala market.
There has been a decent appetite, and good issuers will continue to tap the market, said Ajay Manglunia, head of fixed income at Edelweiss Capital. Masala bonds will be well received for the five-year maturity as well.
