Home and away: international bond issuance cools on India’s primary DCM

Data InsightDebtDynamics 6 December

Home and away: international bond issuance cools on India’s primary DCM

Primary bond issuance in India dipped 20.6% year-on-year (YoY) in 3Q22 in terms of volume, continuing the downward trend seen over the course of this year. Notably, there were no international deals in 2Q22, and only a handful coming to the market in 3Q22, while the rest of the volume was made up of domestic instruments.

Has international issuance dried up for now?

In 1Q22, Indian issuers tapped international markets for USD 6.9bn worth of bonds vs USD 11.9bn in 1Q21; however, 2Q22 was much quieter.

One reason for the paucity of international deals has been an intensifying depreciation of the Indian rupee, with the INR/USD exchange rate widening 13.5% between January and October. This makes borrowing international funds more expensive compared with local deals. Two companies in 2022 preferred local deals over hard currency alternatives: agricultural firm Sael (formerly Sukhbir Agro Energy) privately placed an INR-denominated refinancing bond instead of a previously planned public USD-denominated deal. Another issuer, Biocon, announced on 14 November its intention for two INR-denominated private placements of USD 250m and USD 275m.

Another factor for dwindling international issuance is the high cost of borrowing. On average, international corporate bonds due in 2023 are yielding around 11%, while bonds due in 2024 are yielding around 10% (as at 18 November), on the back of rising US Treasury yields. This high pricing has led several companies to postpone their USD-denominated deals. In May, State Bank of India (SBI) announced plans to raise up to USD 2bn in international bonds before March 2023, but it has only priced one USD 300m bond so far.

Which sectors squeezed in FX financing in 2022?

Finance and energy have led international markets this year, while banks and other non-banking financial institutions (FIs) accounted for 32% of overall placements by amount issued in 2021. While banks and FIs have been at the forefront of 2022 issuance, their slice of the pie has ballooned to 55% because of a lack of activity in the telecoms, IT, construction/real estate, and automotive sectors. FIs, energy, metal & mining, and transportation are the only sectors that managed to squeeze in deals in 1Q22 before US Treasury yields started their ascent.

Refinancing deals are being mothballed

Indian corporates and FIs secured on average around USD 6.5bn of refinancing or debt-repayment deals between 2019 and 2021. This contrasts with 2022 YTD, which has seen only one international deal (worth USD 400m) intended for debt repayment. This year’s lack of activity is reminiscent of 2018 volumes (see chart below). Refinancing deals that do not complete by the year-end are likely to be postponed until mid-to-late 2023, provided pricing starts to fall.

Overall, US Treasury yields have affected primary issuance to some extent across all emerging markets, but a recovery in FX issuance is only likely to happen when the Fed eases interest-rate hikes. A similar trend was seen back in 2018, however, 10-year US Treasury yields were only around 3% then. Nevertheless, the turnaround was relatively fast, with markets enjoying a recovery from the start of 2019, as the US key rate plateaued. This time, 10-year US Treasuries have already reached 4.21%, driven by a rising key rate, and while there are signs of softer hikes in the future, we do not expect much activity until rates stabilise.

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