Masala bond market still bland for issuers as caps remain

Bloomberg

Two months after suspending masala bonds sales by local issuers, India lifted restrictions on issuance. That was the easy part.
Masala bonds, or rupee-denominated debt securities sold abroad, are still subject to caps on pricing and tenor. Issuers must also compulsorily seek approval from the Reserve Bank of India (RBI) before every sale—constraints that may keep issuance from picking up pace.
“Waiting for a go-ahead from the RBI each time can be challenging as companies hit the market at an opportune time,” Umesh Revankar, managing director of Shriram Transport Finance Co., a financier of commercial vehicles, said in a phone interview. The company raised Rs13.5 billion via such bonds earlier this year.
Masala bonds will be treated as external commercial borrowings starting 3 October, the central bank said late on Friday, removing them from the cap on foreign holdings in rupee company bonds after global funds exhausted almost all of the total limit of Rs2.44 trillion ($38 billion). Companies are unlikely to “rush” with offerings of such securities, Revankar said.
The central bank in June imposed a price ceiling on masala bonds and made it mandatory for issuers to sell notes maturing in at least five years if they raise more than $50 million. Next month, the market regulator halted sales after global holdings of rupee debt hit limit. Almost two-thirds of the Rs195 billion raised since the first masala sale by an Indian firm in July 2016 mature in less than five years, as per data compiled by Bloomberg.

Pay extra
The gap in pricing between the shorter tenor—for which there’s more demand—versus five years mandated by the central bank is another reason why companies may prefer to tap the domestic market, Shriram’s Revankar said.
“The yield gap between pricing a three-year paper over a five-year one could be as high as 50 basis points if a company raises money via masala bonds,” he said. “Onshore, this could be about 15 basis points. Nobody would want to pay extra.”
“The RBI circular just re-opens the masala market,” said Revankar. “Companies would rather wait and watch.”