Indian regulator warns against novel bond structure

[SINGAPORE] The Reserve Bank of India has effectively outlawed a new structure, pioneered by Greenko Group in July this year, which had promised to open up the offshore bond market to a far wider number of Indian issuers.

Indian companies have been rushing to tap international bond markets in recent months, taking advantage of surging overseas appetite for Indian risk, as well as a cut to withholding tax that has made it cheaper for them to issue US dollar debt.

Overseas offerings, however, are subject to tight restrictions governing uses of proceeds and maximum interest rates, and the RBI's latest notification will limit the number of lower-rated Indian companies that are able to access international capital.

The RBI sent out a reminder to banks on November 25 warning them that issuers are not allowed to provide guarantees or create contingent liabilities for borrowing by offshore units, or use funds onshore that have been raised offshore in such structures, unless explicitly permitted under existing regulations. It said that any issuers or banks that do so could be penalised under the Foreign Exchange Management Act.

Power producer Greenko in July raised USD550m from a 144A/Reg S offering of innovatively structured five-year non-call three senior unsecured bonds, priced to yield 8 per cent. The issuer, Greenko Dutch, sold US dollar bonds guaranteed by Greenko Group and the proceeds were used to subscribe to rupee bonds from a group of entities holding certain power assets. The structure was intended to give the offshore vehicle recourse to onshore assets.

The deal took advantage of a change to regulations which allowed issuers to sell Indian rupee denominated non-convertible debentures to offshore entities without being subject to the Libor plus 500bp funding cap that has restricted Indian high yield issuance over the years. "I doubt they will ask Greenko to cancel the bonds as that would be pretty serious and might create severe liquidity issues for the company, but the regulators are clearly plugging the hole here," said one DCM banker away from the deal.

The RBI's announcement will be a blow to other Indian issuers that had hoped to follow Greenko to the offshore bond market using similar structures. Wind power developer Mytrah Energy was planning to use the same kind of structure in its proposed US dollar deal.

A spokesman for Deutsche Bank, which was sole global co-ordinator and joint bookrunner on the Greenko bond, declined to comment. Barclays, Investec, JP Morgan and Standard Chartered were the other bookrunners.

Greenko's bonds were quoted at 94.5/95.5 this afternoon.


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