The recent issuance of the first offshore masala bonds by Indian companies could pave the way for a broader opening and development of the market, says Fitch Ratings. This will be positive for the better-quality issuers that are able to take advantage of offshore capital markets to diversify their funding sources without assuming currency risk.
The inaugural offshore masala bonds issued by HDFC on 14 July and NTPC on 4 August mark the first time Indian firms issued rupee-denominated debt overseas.
HDFC raised INR30bn (USD449m) through its three-year bonds, while NTPC raised INR20bn by selling five-year "green" bonds, which Fitch rated 'BBB-(emr)', to support renewable power projects. Both issues were over-subscribed, attracting 40 and 60 international investors for HDFC and NTPC, respectively.
The masala bond market is in its infancy, but the two recent issues should mitigate initial market concerns about liquidity. That India's first corporate masala bonds were issued by better-quality firms probably helped support investor demand and with their relatively attractive pricing.
Fitch says the bond pricing was surprisingly competitive relative to onshore funding considering uncertainty over liquidity and currency risks. “We believe this could encourage other Indian issuers to go to the market,” says Fitch.
India's forecast high growth relative to other emerging markets over the next several years should help to bolster global-investor interest in the masala bond market. The next test will be for issuers further down the credit curve to try tapping into this market.
“We believe it is likely only the large, well-known and better-quality issuers will tap that market in the near-term,” says Fitch.
Foreign investors take currency risk when buying masala bonds; the limited offshore liquidity in rupee, cost and availability of hedging, and investors' view of exchange rate movements will affect pricing. As such, the market's development will remain especially subject to international liquidity, foreign investor sentiment, and global and domestic macroeconomic conditions.
Fitch maintains that non-bank financial institutions (NBFIs) could particularly benefit from offshore rupee financing. NBFIs currently rely heavily on domestic banks for funding and are likely to be incentivized to issue bonds, even for slightly higher costs, to diversify funding sources.
Electricity utilities in India with assets operating under a regulated return-on-invested capital model, such as NTPC and transmission utilities, are also likely candidates, according to Fitch.