Indian companies had flooded the dollar bond market in 2021, emboldened by low-interest rates amid copious global liquidity. That dollar bond party just got extended into 2022 with Reliance Industries Ltd’s latest $4 billion bond issuance.
RIL issued 10-year, 30-year, and a benchmark 40-year dollar bond to global investors at competitive pricing. Its issue received a total subscription in excess of $11 billion which shows that foreign investors are still enamored by Indian bonds. Indeed, during 2021 Indian companies raised $18.5 billion through dollar bond issuances, a 65 percent year-on-year increase according to Dealogic data. The total issuance from India including sovereign added up to $26.03 billion in 2021.
Encore in 2022
Bankers believe that Indian companies would be able to raise a significant amount from global bond markets in 2022 and RIL’s issue may act as a catalyst. “The phenomenal response to the bond issuance clearly demonstrates the quality of the RIL credit and also evidences that there is tremendous global liquidity available for well-rated Indian issuers, who will be able to get size and tenure,” said Asit Bhatia, Managing Director, Global Corporate and Investment Banking, Bank of America.
RIL raises $4 billion in US dollars. Key highlights of India’s largest forex bond issue
RIL’s issue received a strong subscription in its 30-year bond, even more than the shorter 10-year paper. It raised $1.75 billion from 30-year bonds and $1.5 billion from the 10-year bond. Bankers said that investors such as sovereign wealth funds and insurance and pension funds saw a clear yield advantage with a proven balance sheet.
Further, the uncertainty over the direction of US interest rates is over with the US Federal Reserve indicating that it would reduce its bond-buying sooner and also begin hiking rates. “Rates are relatively stable and there is enough liquidity which investors are happy to deploy into quality credit. The clarity of the Fed’s tone helps investors make investments with conviction,” said Hardik Dalal, Managing Director & Head of Loans and Bonds, Barclays Bank India.
Bhatia agrees, adding that the issuance volume could rival that of 2021. “The RIL issuance sets the tone for the rest of the year. I reckon some high-quality Indian companies will follow suit and tap the market to fund capex and growth requirements,” he said.
What works for Indian companies is the fact that they have deleveraged their balance sheet over the past several years. Further, the earnings performance of large listed Indian companies has been healthy in the past four quarters. Yet another reason is that bonds of Indian companies offer a higher yield compared with many peer emerging market economies. Bankers reckon that the yield advantage of Indian companies will remain intact.
Look out for risks
The 2021 dollar bond issuance is not exactly a celebratory matter. Companies used the bulk of the funds towards retiring old costly bonds and not for capital expenditure or fresh investment. Bankers hope that the current year would be different. Out of the $4 billion raised, RIL intends to use $1.5 billion towards refinancing its old debt.
Then there is the cost factor which is at risk. The cost of dollar borrowing won’t stay cheap for Indian issuers. The yield on benchmark US treasury bonds has spiked in the past few weeks and the US Federal Reserve’s statements have strengthened the expectations of further rise in interest rates.
That would drive up the cost for Indian issuers in the coming months. Dalal believes that for longer durations, issuers should be willing to pay up. The threat of inflation and the beginnings of tightening of monetary policy across geographies may keep the pressure up on interest rates.
RIL’s pricing may not be replicated by other top-rated companies.
That said, the cost may still be lower than the levels seen before the pandemic. “Spreads had compressed in 2020 and the first half of 2021. They have remained steady since then,” points out Dalal of Barclays.
The upshot is Indian companies may continue to find it easy to raise dollars from global markets given that global liquidity won’t drastically reduce. But the price of liquidity is another matter and the use of the funds yet another.
Disclaimer: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.