IFR Asia – September 30, 2017

and brought Masala issues
under that regime in April

2016. That move had little
      impact at the time, but strong
      inflows earlier this year took
      foreign investment past 95%
      of the ceiling in July. Beyond
      that point, investors must bid
      for the remaining quota in
      an auction, making Masala
      issuance impractical.
      RBI said offshore rupee-
      denominated bonds will remain
      under existing rules on external
      commercial borrowings, which
      apply maximum coupons and
      tenors to foreign debt. Issuers
      still need approval from the
      central bank, but there is no
      overall investment quota, and
      no limit on how many times an
      issuer can sell Masala bonds.
      “Several state-owned
      companies are looking at
      Masala bonds because onshore
      issuers have a limited number
      of bond lines which they
      can tap,” said a DCM banker.
      “Masala bonds will supplement
      their overall borrowings.”
      The securities regulator
      introduced new rules in July
      which limit the number of
      individual bonds a company
      can issue onshore each year.

RUPEE SUPPORT
The RBI announced the new
rules on September 22, in
the midst of a slide in the

rupee against the dollar. By

September 28, the rupee had

weakened 3% since the start

of the month to a six-month

low of 65.855, following

expectations of fiscal stimulus

in India and the US Federal

Reserve’s decision to begin

cutting its balance sheet from

October.

“The rupee was depreciating

as foreign investors were taking

out money from India. The

central bank saw there was

support coming in from debt

flows given the high level of

bids which FPIs put to own

onshore corporate bonds,” said

Tanveer Sethi, fund manager

with Kotak Mahindra Group.

Foreign investors have used

up almost all of the US$51bn

quota of corporate bonds

and bid aggressively for the

remaining amount in the

four auctions held so far. The

latest auction, on September

20, cleared at 50.01bp for

an allocation of Rs22.29bn,

compared to 8bp in July. This

meant that investors were

willing to pay a fee of Rs0.

for the right to buy Rs100 of

bonds under the quota.

“Any support RBI can give to

stem the rupee’s slide, without

using reserves, is a welcome

step,” said Sethi of Kotak.

ANZ in a note dated

September 26 said the move

“will go some way to allaying

onshore market participant

concerns about an abrupt

slowdown in bond inflows due

to the limits”.

Inflows from foreign

portfolio investors into debt

slowed as the need to bid to

own rupee bonds had eroded

returns after hedging the

rupee risks, said Alok Rathore,

associate director at IDFC

Securities Singapore.

ANZ research analysts

estimated that the limit

utilisation rate would decline

to 87.9% on October 3, from

98.8% currently, assuming the

current level of FPI corporate

bond investment stayed the

same.

RBI said Rs270bn would be

available for foreign portfolio

investors in corporate bonds

in the December quarter

and Rs170bn in the March

quarter. RBI also raised the

foreign investment limit for

government bonds by Rs80bn

to Rs2.5trn for the October-

December quarter, after

current quotas had been fully

exhausted.

In each of these two quarters,

Rs95bn of the extra limit will

be reserved for investment

in the infrastructure sector

by long-term foreign

portfolio investors (FPIs)

such as sovereign wealth

funds, multilateral agencies,

endowment funds, pension

funds and foreign central

banks, the RBI said.

Foreign ownership in

domestic rupee bonds is

quite low, at 7.1%, compared

to countries like Malaysia

and Indonesia where foreign

ownership is closer to 30%.

“RBI does not want to put

a complete stop to FPI flows

in rupee bonds,” said IDFC

Securities’ Rathore. „

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visit http://www.ifrasia.com

for Geo Energy’s bonds. On
Wednesday, despite keeping
the structure unchanged, the
coal producer managed to
price the 8% notes at 98.792 to
yield 8.3%, having tightened
from initial guidance of 8.75%
area.
Leads pointed to Indonesian
coal credits like ABM Investama
and Indika Energy as price
references. ABM Investama,
rated Ba3/BB (Moody’s/Fitch)
had 2022s quoted at around
6.2%, while Indika, rated
B2/B– (Moody’s/Fitch), but on
review for potential upgrades,
had 2022s at 5.6%. Single B
Indonesian credits outside the
energy sector were seen at
7.0%–7.9%. That made the 8.3%
yield from Geo Energy, rated

B2/B/B+, look attractive for

investors.

The improvement in

market conditions since the

postponement of the original

deal on July 24 could be seen

in the yields of the 2022 bonds

of ABM Investama and Indika,

which had been trading at 7.4%

and 7.0%, respectively, back

then.

The other two transactions

had to offer more generous

terms to investors.

Bain Capital-owned

Lionbridge (B2/B/B) had

marketed three-year bonds

at 9.5% area in July, but failed

to attract sufficient investor

interest, as Chinese high-yield

bonds sold off due to concerns

about potential regulatory

clampdowns on acquisitive

companies like HNA and Dalian

Wanda.

On its return, it opted for

a three-year non-call two

structure and a higher yield of

9.75%. Some Asian investors

tend to view call options as

little different to put options,

reducing the length of the

investment.

Oil services provider Yinson

marketed a perpetual non-call

five at initial guidance of 8%

area, before pricing a US$100m

note at 7.85%. Investors were

heartened when it reported the

previous day a quarterly profit

of M$83.6m (US$20m), up 38%

year on year, and it started

with anchor orders of US$80m,

providing confidence that it

could achieve its relatively

small target size.

JP Morgan , Deutsche Bank ,

Citic CLSA Securities and BOC

International were joint

bookrunners for the Geo

Energy deal, with Citic

CLSA joining after the July

roadshows.

Guotai Junan International ,

UBS and ICBC International were

joint global coordinators on the

Lionbridge issue. They were

also joint bookrunners with

Zhongtai International.

Standard Chartered Bank and

Credit Suisse were joint lead

managers for the Yinson deal.

BNP Paribas was sole

global coordinator for Nan

Hai’s transaction and joint

bookrunner with AMTD. „

“The current change in RBI guidelines is more

to do with government pressure; they want the

Masala product to succeed. No one knew where

the product was heading before this.”