Bloomberg News

Mumbai Road Builders Ready First Dim Sum Offering: India Credit

September 21, 2011

Sept. 21 (Bloomberg) -- Indian companies may turn to Hong Kong’s yuan bond market to raise funds at 40 percent the cost of top-rated companies at home after the South Asian nation eased borrowing rules.

The government agreed for the first time last week to allow Indian companies raise as much as $1 billion of debt in the Chinese currency, bolstering the yuan’s challenge to the dollar as a funding currency. Mumbai-based Infrastructure Leasing & Financial Services Ltd., an Indian lender to road projects, plans to raise $100 million in yuan bonds and developer Unity Infraprojects Ltd. said it may consider a sale.

Yields on so-called dim sum bonds fell 3 basis points in September to 2.8 percent, while three-year AAA-rated corporate notes in India climbed 7 basis points this month to an average yield of 9.46 percent, after the Reserve Bank of India raised interest rates 12 times since March 2010 to slow inflation. U.S. dollar bonds from India pay an average 6.25 percent, an index compiled by JPMorgan Chase & Co. shows.

“Most of the India issuers, including the banks, are high yield, but they still can save some money in the yuan market,” Steve Wang, the head of fixed-income research in Hong Kong at BOCI Securities, a unit of Bank of China Ltd., said in a telephone interview on Sept. 16. Top-rated Indian companies would be able to sell yuan debt for around 3 to 4 percent, he said.

Dim Sum Bonds

International bond sales by Indian companies stalled this month, while sales in rupees dropped 79 percent to 52 billion rupees ($1.1 billion), according to data compiled by Bloomberg. In Hong Kong, companies have raised 8.9 billion yuan ($1.4 billion) in the dim sum bond market this month, with sales tripling this year to a record 118.9 billion yuan.

China, which was the biggest contributor to world growth last year, according to the International Monetary Fund, is promoting the yuan’s use in global trade and finance.

Yuan deposits in Hong Kong probably totaled a record 572.2 billion yuan at the end of July, almost double the level at the end of 2010, according to Hong Kong Monetary Authority data.

“The IL&FS group is to raise an equivalent of $100 million in yuan-denominated bonds,” Milind Patel, the Mumbai-based deputy managing director of IL&FS Financial Services Ltd., a unit of lender Infrastructure Leasing & Financial Services, said in a telephone interview yesterday.

The company retained Deutsche Bank AG, Royal Bank of Scotland Group Plc and UBS AG to manage the issue.

‘Attractive Proposition’

Rural Electrification Corp., India’s state-controlled lender to power projects, has applied to China Export and Credit Insurance Corp., the state-owned export credit agency known as Sinosure, for a guarantee on a $350 million loan, Chairman Hari Das Khunteta said in an interview on Sept. 16.

“Borrowing in yuan-denominated debt is an attractive proposition and we will consider it soon to offset rising interest costs in India,” Madhav Nadkarni, chief financial officer at Mumbai-based Unity Infraprojects, said in a telephone interview on Sept. 19 in Mumbai. “Allowing issuance of debt denominated in many currencies is becoming a necessity and not an option.”

Power companies such as Lanco Infratech Ltd. and Adani Power Ltd. have also said they’re talking to Chinese banks for loans after Reliance Power Ltd. borrowed $1.1 billion from China Development Bank Corp. in December.

Growth, Inflation

“Yuan is a strong currency and China has reserves of more than $3 trillion,” Khunteta said. Rural Electrification will borrow in yuan “if the terms are good and taking into account interest rates,” Khunteta said.

Annual trade between the world’s most populous countries will touch $60 billion in 2011, the Federation of Indian Export Organisations, a government-affiliated trade group, said in a statement on April 15.

The Asian Development Bank cut its forecast for India’s economic expansion in the year ending March 31 to 7.9 percent last week from 8.2 percent estimated in April. Gross domestic product gained 7.7 percent last quarter from a year earlier, the smallest gain since 2009, a government report showed on Aug. 30.

Benchmark inflation in India is the highest among the so- called BRIC nations, increasing to a 13-month high of 9.78 percent in August, according to government data.

Consumer prices rose 7.2 percent in Brazil, 8.2 percent in Russia and 6.2 percent in China last month from a year earlier. In South Africa, they climbed 5.3 percent in July.

Credit-Default Swaps

The cost of insuring against default the debt of government-owned State Bank of India, seen as a proxy for the nation, climbed 43 basis points this month to 318 yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Yields on India’s benchmark 10-year bonds fell one basis point to 8.33 percent today in Mumbai, according to the central bank’s trading system. The extra yield investors demand to hold five-year company debt rather than similar-maturity government securities has risen 6 basis points this month to 95, according to data compiled by Bloomberg.

Industrial & Commercial Bank of China Ltd., the world’s largest bank by market value, may provide dim sum bond services to Indian companies, Yang Kaisheng, president of the Beijing based bank, said in Mumbai on Sept. 15.

Yuan Appreciation

Indian companies can now see how the yuan is appreciating and might want to hold some renminbi funds, Yang said. The yuan is the only currency among the biggest emerging nations to strengthen against the dollar this quarter, and yuan-denominated notes in Hong Kong are the only domestic bonds among the so- called BRICs to provide positive returns, according to indexes compiled by HSBC and JPMorgan.

“The moment China delinks the renminbi, the currency will appreciate,” Prabal Banerji, chief financial officer at Adani Power Ltd. in the western Indian city of Ahmedabad, said in an interview on Sept. 13. “It will be inadvisable and not appropriate for Indian corporates to borrow renminbi at this point of time. A rising yuan means all borrowers will be out of money.”

The rupee declined 6.8 percent this quarter, the second- worst performer of the 10 Asian currencies tracked by Bloomberg. India’s currency climbed 0.3 percent to 47.9150 per dollar today in Mumbai, according to Bloomberg data. The yuan appreciated 1.4 percent this quarter to 6.3776 per dollar in Shanghai, according to the China Foreign Exchange Trade System.

‘New Animal’

Investors will be interested in Indian dim sum bonds to tap potential for growth in the South Asian nation without taking a currency risk, said Dariusz Kowalczyk, a senior strategist at Credit Agricole CIB in Hong Kong. “Indian yields may be more attractive,” he said.

Dim sum bonds returned 0.6 percent this quarter, compared with losses of 11 percent for local-currency bonds in Brazil, 10.1 percent for Russia and 6.3 percent for India, according to indexes compiled by HSBC and JPMorgan.

“Yuan debt from India is a new animal,” said Hong Kong- based Atul Gharde, a credit analyst at SJS Markets Ltd. “This is more of a diversification strategy for Indian dim sum issuers and a new market opening up for Chinese investors.”

--Anurag Joshi, Henry Sanderson. With assistance from Anoop Agrawal in Mumbai and Kyoungwha Kim in Singapore. Editors: Shelley Smith, Anil Varma

To contact the Bloomberg News staff for this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net Henry Sanderson in Beijing at hsanderson@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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