Indian Junk Bonds Make A Comeback, Issuance Soars

Sales of Indian junk bonds have made a big comeback in 2019, almost tripling to hit a five-year high, boosted by a risk-on rally prompted by a dovish US Federal Reserve that has given the Asian market a record start to the year.

Indian companies have sold $3.7 billion in high-yield, or junk-rated, bonds so far this year, an increase of 187 percent from 2018, Refinitiv data show. The last time Indian companies sold more junk bonds was in 2014, when total volumes for the year were $4.1 billion, the data showed.

“We've got quite a long pipeline of Indian issuers looking at the market as they take advantage of the market this year as financing costs are more attractive versus last year,” said Amy Tan, head of debt capital markets origination, Asia ex-Japan, at JP Morgan.

On the basis of benchmark 10-year US Treasuries , interest rates have fallen almost 70 basis points from their peak in 2018. Investors are pouring funds into emerging markets after the US Federal Reserve signalled US interest rates may not rise this year.

Sales of junk bonds in Asia reached a record $27.5 billion in the first quarter, Refinitiv data shows, much of it driven by Chinese property developers. Indian issuers have also jumped into the market.

Miner Vedanta Resources Finance sold $1 billion in four- and seven-year bonds earlier this month — the largest junk bond sale out of India this year. Steel company JSW Steel Ltd raised $500 million in five-year bonds, while Shriram Transport Finance Company Ltd sold $900 million in three- and three and a half-year bonds.

In a tumultuous 2018, rising US interest rates and weak markets pummelled emerging markets, shutting out many borrowers, so the strong start to this year has come as a relief to bankers and many investors.

India only saw one high-yield deal last year, while some Chinese property borrowers were forced to pay double-digit coupons for two-year borrowings.

“Markets just weren't there last year. If you look at Indonesia, ASEAN, China non-property, there was very little supply,” said Rishi Jalan, co-head of debt syndicate for Asia for Citigroup.

The Reserve Bank of India’s decision to relax offshore borrowing rules also boosted the sale of junk bonds and higher-grade dollar debt by Indian issuers.

Borrowers can now raise an unlimited amount of funds from offshore markets for at least three years. Previously, the RBI had imposed a $50 million ceiling.

“The two key reasons for the resurgence of India high yield is, firstly, the change in Fed policy stance leading to Asia high-yield markets reopening, and secondly, the RBI relaxed the external commercial borrowing regulations, increasing the universe of potential borrowers,” said Sameer Gupta, head of debt capital markets, India at Deutsche Bank.

Gupta added that hedging costs had fallen significantly thanks to swap auctions conducted by the RBI, making it less expensive to raise US dollars.

Indian debt also provides investors with diversification from China, where real estate developers have issued the bulk of Asian junk bonds this year, with several of them having conducted two or three bond sales in 2019. “Given the amount of China and China property supply that's come out, India is providing a good diversification angle, which investors like,” Jalan said.