Bond sales in dollars by Indian companies are outstripping loans for the first time in five years as banks worldwide lend less in response to Europe’s debt crisis and rising capital requirements.
Borrowers have raised almost $1.7 billion in 2012, led by billionaire Mukesh Ambani’s Reliance Industries, which sold $1-billion worth of 10-year notes last week. Companies’ syndicated loans denominated in the US currency totaled $505 million, the least since 2004, according to data compiled by Bloomberg. The last time bonds beat loans at this stage of the year was in 2007.
The surge in bond sales is being spurred by record inflows into emerging-market debt funds and the rupee’s 8% advance this year, the best performance among Asia’s most-traded currencies. Dollar borrowing costs for Indian companies have dropped 97 basis points in 2012 to a three-month low of 512 basis points, or 5.12 percentage points, over US Treasury yields, while the London Interbank Offered Rate, to which loans are pegged, rose to a two-year high of 0.58% last month.
“With the European banks pulling out of the region, bonds will be many companies’ best bet,” Viktor Hjort, the Hong Kong- based head of fixed-income research at Morgan Stanley, said on Tuesday. “Corporate bond supply will rise as the cost of loans will rise.”
Indian companies raised $8.1 billion from dollar bond sales in the whole of 2011, compared with the $28.5 billion they obtained from US currency loans, according to data compiled by Bloomberg. That may change this year as European banks curtail funding in Asia, according to Morgan Stanley.
Natixis, the investment-banking arm of France’s second- largest retail lender, said in December it is scaling back telecommunications and shipping financing in Asia. Societe Generale, France’s second-largest bank, agreed to sell $600 million of commercial-property loans to Australia’s Macquarie Group as it pares assets, people familiar with the matter said on November 30.
Global financial institutions are also implementing international Basel III capital rules, which will increase the amount of cash that banks have to hold on their balance sheets to hedge against defaulting loans.
“Even before the formal decisions were implemented to raise capital standards, many European banks had already decided to reduce their exposure in Asia,” Hjort said. “Many Asian banks lent aggressively over the past few years and overextended their loan books.”
Banks are turning to the bond market even as the cost of acquiring loans is getting cheaper. The average margin on Indian companies’ dollar loans has dropped 19 basis points this year to 230 basis points over Libor. Reliance’s bond sale was the biggest by an Indian company since August. The notes, priced to yield 5.468%, were nearly eight times subscribed with an order book of around $7.8 billion, according to a company statement on February 10.
The yield on Reliance’s notes due 2022 traded little changed at 5.31% on Wednesday, according to Royal Bank of Scotland Group prices. The 10-year rupee borrowing cost for companies rated AAA by S&P’s Indian unit Crisil was 9.24% on Tuesday, 107 basis points more than similar- maturity government bonds.
The yield on sovereign benchmark debt due in November 2021 fell three basis points to 8.17% on Tuesday, according to the central bank’s trading system. The difference in yields between those notes and comparable US Treasuries was 622 basis points, having narrowed 26 basis points in February….