Note to readers: Hello world is a program developers run to check if a newly installed programming language is working alright. Startups and tech companies are continuously launching new software to run the real world. This column will attempt to be the "Hello World" for the real world.
Between 1998 and 2000, Amazon raised $2.2 billion in three junk bond offerings, Brad Stone, the author of The Everything Store points out. The capital came cheap as lenders at the peak of the dot-com boom were happy to take risky bets. Jeff Bezos used this money to fund the company’s hyper growth—acquiring companies and building distribution centres across America.
Just ahead of the dot-com crash, Amazon again sold convertible bonds worth $672 million to European investors to shore up its balance sheet. The money from corporate bonds helped Amazon tide over the crash. “Without that cushion, Amazon would almost certainly have faced the prospect of insolvency over the next year,” Stone writes in the book.
While Bezos was vocal about the fact that he’s not defined by his stock price, the crash ushered in an era of “discipline, efficiency and eliminating waste” at Amazon.
It was a private equity investor who last month pointed out to me that these events, leading up to the crash and after, are instructive these days as several Indian tech companies gear up to go public. “India’s junk bond markets are not mature like in the US, and if these companies need more money to fuel their growth, they might have to raise more money,” the private equity founder said.
The argument goes something like this: The markets are doing well these days because of fiscal stimulus and lower interest rates in the wake of Covid-19. So it is a good opportunity for these companies to list. But which companies will do well?
The companies that have sound business fundamentals and have a path to profitability will probably sail through. But for companies that may need to raise more capital along the way after going public, like Amazon in the late noughties, this may mean raising capital from corporate bonds. This is where it gets tricky in India.
India’s corporate bonds market is expected to double to ₹65-70 lakh crore by fiscal 2025, but more than 80% of this goes to government bonds. The rest of the money chases top rated bonds. That is, junk bonds also known as high yield bonds, hardly get any traction.
By that logic, India’s bond markets may not be very receptive to loss making companies. Raising money in times of distress is almost never a good idea. Take the case of Kesoram Industries Limited, the 100-year old cement manufacturer from Kolkata. Bloomberg reported in March that the debt-laden company raised $221 million from bonds rated D at a yield that can go as high as 21%. That's very expensive capital.
The silver lining is that Indian firms can tap into the offshore bond market which seems to be showing an appetite for Indian companies (although mostly in infrastructure). In the first two months of 2021, Indian companies such as Adani Ports, Power Finance Corporation and SBI have raised over $3.3 billion from overseas bonds, according to Refinitiv, a market data service. I’m not an expert on corporate bonds and it may yet rise up to meet the demand in the future, but common sense dictates that like Amazon, Indian tech companies might soon enter an era of “discipline, efficiency and eliminating waste”, once they go public.