InvestorQ : Why has there been such a sudden rush to tap the global offshore bond market among the Indian corporates? What is the attraction?
Angel dcosta made post

Why has there been such a sudden rush to tap the global offshore bond market among the Indian corporates? What is the attraction?

Juvina Maggie answered.
1 year ago

In the last few months, many Indian corporates have been rushing to tap the offshore bond market. The intent is to raise debt with the market once again opening its arms to high-yield bond issuers. In the first month of January 2021, Indian companies have raised a sum of $3.3 billion by issuing debt paper to overseas investors. This data has been authenticated by inputs from Refinitiv.

Some of the popular names in India that have raised funds through the global offshore route in recent times include Adani Ports and SEZ, Continnum Green Energy and government owned entities like SBI and Exim Bank. Other names raising funds through this route include Power Finance Corporation, Ultratech Cement, ReNew Power and IRB Infrastructure, among others. More names are likely to crop in the near future.

This year has started off on a positive note for the offshore bond market with the EXIM Bank bond issue getting oversubscribed. For the issuers of these bonds, there is a clear advantage of lower interest rates in the offshore bond market, although the currency risk still exists. One reason to tap the offshore bond market is to repay or at times to even pre-pay their higher-priced loans.

There are practical reasons too. When domestic institutions hit their lending limits, it is the global market that can provide funds without inhibitions. Even in a tough year like 2020, the offshore debt market managed to raise $13.9 billion in the year. Of course, one can argue that it was lower than the $21.4 billion raised in 2019, but in a tough year it was a job well done. Recently, the global offshore bond market has also opened up to high yield debt.

This trend is significant because this market essentially did not have an appetite for high yield debt. Now that appears to have also emerged as global fund managers hunt for yields in market where coupon yields have vanished along with inflation. Investors are now looking to take advantage of this opportunity, even if it comes at higher risk. Broadly, there are two companies active; renewable or ESG-related companies and manufacturing companies.

There is also need for caution in this source of funding. While on paper, the borrowing costs are lower overseas, the differential may not be really significant once all costs of offshore borrowing are taken into account including the currency risk. This risk is more pronounced for the lower-rated companies. Experts do caution that not all small companies must rush into this market headlong without understanding the risks.

For the lower rated borrowers looking to capitalize on high-yield debt, this off shore debt issue route can effectively be more expensive. That is because when you add the withholding tax, hedging costs, rating and listing costs, it may actually be cheaper to raise monies in India. However it cannot be disputed that it does offer an opportunity for Indian companies to diversify their sources of funds.