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India Inc turns to public bonds for depth, diversity
[SINGAPORE] India's private-sector borrowers are lining up public debt offerings in response to strong investor demand and supportive bond market reforms.
Traditionally, corporate bonds have been sold through private placements in India, but some large issuers are finding success via the public route and inspiring others to follow suit.
Dewan Housing Finance Corporation (DHFL) last Monday priced the largest bond from India's private sector, raising 100 billion rupees (S$2.04 billion) in a three-tranche offering, which pulled in bids of 126.45 billion rupees.
The offering drew an overwhelming response across all investor types in just two days, said Vikas Dawra, managing director at Yes Securities, a lead manager on the issue.
This success would encourage more companies to plan public bond issues, bankers said.
Indiabulls Housing Finance aims to raise 70 billion rupees from a public issue of bonds and Srei Infrastructure Finance is targeting 10 billion rupees via the same route.
Bankers said non-banking financial companies, such as Edelweiss and Shriram Transport Finance, could also use the public route to raise debt as could entities in other sectors.
Public bonds allow issuers to access a wider investor base, with the potential to raise larger amounts, but issuance costs are also higher.
"The cost for companies to do a public issue is slightly higher as they have to pay one to 1.5 per cent fees to the arrangers, compared to a 10bp-20bp commission when they place these bonds privately, but it helps diversify the investor base and improves liquidity in the bonds," said a fixed-income trader.
The emergence of large public issues comes after the Reserve Bank of India introduced a rash of regulatory changes last month to improve liquidity and depth in the corporate bond market and make businesses less dependent on bank loans for funding.
From the 2017 fiscal year starting in April, major Indian borrowers will be barred from relying on banks for more than 50 per cent of their total funding.
As a result, some companies are looking to build their market profiles early instead of waiting for the last minute.
"Because of RBI's reforms and successful debuts of large public issues, regular companies are thinking of issuing bonds of larger size to the public, in the range of 5 billion-10 billion rupees," said Vikas Jain, senior vice president at AK Capital.
The DHFL issue was oversubscribed across all investor categories, including qualified institutional buyers, corporate and retail.
"At the longer tenors, we saw money pour in from retirement funds and insurance companies, as well," said Mr Jain.
For retail investors, a three-year was priced at 9.10 per cent, a five-year at 9.20 per cent and a seven-year at 9.25 per cent. The coupon for QIBs and corporates was set at 9.05 per cent across all three tenors.
Interest from pension funds was apparent in the secondary market as the bonds offer higher returns than those of state-owned Rural Electrification Corporation and Power Finance Corporate, which yield in the range of 7.3 per cent to 7.9 per cent.
"With the falling interest rate scenario, it becomes more difficult for insurers to earn a reasonable yield on portfolios," said Aneesh Srivastava, chief investment officer at IDBI Life Insurance.
DHFL's bonds had AAA ratings from Care and Brickwork, providing comfort to investors, he said.
With bank deposit rates at around 7.0-7.5 per cent, retail investors also found DHFL bonds attractive.
While returns look lucrative, investors must do proper due diligence and realise that poor liquidity at some tenors might make it hard to exit their investments, bankers have cautioned.
"There is little liquidity in the long duration bonds in the secondary market; we need to see how the liquidity pans out,"said R Sivakumar, head of fixed income at Axis Mutual Fund.
AK Capital Services, Axis Bank, Edelweiss, ICICI Bank, IIFL Holdings, Indusind Bank, SBI Capital Markets, Trust Capital and Yes Securities were lead managers on the DHFL issue.