Rising rupee recharges Masala bonds
* NTPC leads next wave of offshore financings
By Krishna Merchant
SINGAPORE, May 2 (IFR) - Indian issuers are dusting off plans for offshore rupee financings after a rebound in the currency brought so-called Masala bonds back on investors' radar.
State-run power producer NTPC last Tuesday raised 20 billion rupees ($312 million) from five-year Masala bonds at a yield of 7.28 percent, after Housing Development Finance Corp set a new Masala milestone with a 33 billion rupees deal at 7.35 percent earlier in the month.
National Highways Authority of India also began marketing a maiden issue of Masala bonds to raise up to 50 billion rupees and Mahindra & Mahindra Financial Services selected six banks for investor meetings.
The stop-start Masala market is attracting renewed interest as the Indian rupee has strengthened 5.7 percent year to date against the US dollar.
“Masala bonds are certainly one way to play the currency view,” said Arthur Lau, co-head of emerging market fixed income and head of Asia fixed income at PineBridge Investments, which can invest in both local and offshore rupee bonds.
"The market in general is sanguine about India’s economic outlook. This, along with a less bullish view on the US dollar in the near term, provides a more positive view on emerging market currencies, including the Indian rupee."
Masala issuance failed to live up to initial enthusiasm following HDFC's debut offering in July last year, and the resurgence of the format points to growing global confidence in India's economy.
"Foreign investors that don’t have India access can play the India macroeconomic story and INR view through the Masala bonds," said Doug Stephen, Deutsche Bank’s head of private debt syndication for Asia Pacific.
Masala bonds are in demand even though onshore rupee bonds offer higher yields. For example, NTPC's five-year Masala was priced at 7.28 percent, 22bp lower than similar-tenor bonds onshore which were trading at 7.5 percent.
There is international appeal, though, because Masala bonds have some investor-friendly features.
Issuers typically absorb the 5 percent withholding tax on rupee coupon payments, and investors have the advantage of settling the bonds via Euroclear or Clearstream.
"Investors don't pay withholding taxes on coupons or capital gain taxes that would normally be payable for Indian onshore bonds, although these are generally reflected in the lower coupon of Masala bonds," said Neeraj Seth, head of Asian credit at BlackRock. CURRENCY OVERVALUED? India has recorded strong foreign portfolio inflows in recent months, with 510 billion rupees coming into the onshore debt market since February. Its stock market is Asia's best performer of 2017, climbing 12.8 percent to April 27.
Rising markets and a stronger rupee point to renewed hopes of structural economic reforms under Prime Minister Narendra Modi, whose Bharatiya Janata Party won the Uttar Pradesh state election last month.
Onshore debt quotas have frequently been under-utilised, but are now filling up fast. Around 77 percent of the foreign portfolio investor debt limit was already utilised in government bonds and 81 percent of the limit was utilised in corporate bonds as of April 26.
BlackRock's Seth expects demand for Masala bonds to grow further when the quota available to foreign investors to invest in Indian government bonds is fully utilised.
However, not everybody agrees about the attractiveness of the offshore bonds.
"We are not a big fan of Masala bonds," said Leong Lin-Jing, investment manager in the Asian fixed income team of Aberdeen Asset Management, which has access to onshore bonds. The returns on Masala bonds are not enough, she said, since the market lacks structural investor support, has poor liquidity and a concentrated investor base, raising the risk of a rush for the exit when sentiment turns negative.
The currency's recent outperformance may also have left it overvalued. Sanjay Mathur, chief economist for South-East Asia and India at Australia and New Zealand Banking Group, predicts "a modest weakening of rupee as the economy recovers by end of the year”, from the current levels of 64.11 against the dollar.
Some asset managers also pointed to the renminbi depreciation in 2015 which led to huge losses for holders of Dim Sum bonds – another asset class that was driven by investors hoping for currency appreciation. (Reporting by Krishna Merchant; Editing by Daniel Stanton and Steve Garton)