IDBI Bank starting issuing offshore debt in 2010 and non-G3 currencies have been a strong pillar of its funding strategy in private placements and public deals ever since. But while IDBI has been able to cut funding costs by accessing alternative markets, it cannot hide from investor worries about India’s rising current account deficit and the country’s lethargy in implementing the reforms that bankers argue are needed to give GDP a helping hand.
The country’s economic problems — slowing growth, rising inflation, continuing criticism of the difficulties encountered by foreign companies trying to do business there — have caused investors to rush for the exit. The rupee crashed to a record low of Rs68.84 against the dollar on August 28.
As a consequence, Indian bank bonds have widened by as much as 150bp since mid-July, which credit analysts say will make it difficult for Indian banks to return to the dollar markets if they are not willing to pay a hefty premium.
Melwyn Rego, who was executive director in IDBI’s treasury department until late August, when he was promoted to be deputy managing director of the bank, has a strong conviction that India’s economy will improve — but concedes that the climate puts the onus on IDBI to educate investors carefully.
Stringent requirements put forth by the Reserve Bank of India should also help IDBI make its case on roadshows, he says. For example, the RBI is requiring banks to meet Basel III rules in 2018, one year earlier than most countries.
“While I agree that there has been a drop in GDP growth, India is still one of the fastest growing economies in the world,” says Rego. “What we are facing at the moment is a temporary blip but I have absolutely no doubt in my mind that India’s growth story is here to stay and India will attract a lot of foreign direct investment over the years.”
To counter the increased instability in financial markets, IDBI has been meeting investors on a pre-emptive basis so that when it decides to come to the market it can complete the process quickly. The bank traditionally prices its deals within three days of any decision to tap a specific market.
The borrower has not ruled out issuing another public dollar bond this year. Rego says that the US dollar market remains open to it, but that the recent widening in spreads makes a deal unjustifiable for the moment.
“The spread between underlying US Treasury yields and Indian secondary bank bond trading levels is too wide now but they will tighten from current levels,” says Rego, adding that this meant it was unlikely that IDBI would try to issue a dollar bond now.
“If the spread between Treasuries and Indian bank secondaries tightens to 300bp-330bp, that should be an attractive level for us to consider issuing a dollar bond.”
IDBI’s outstanding 2018s were quoted at 420bp/370bp over Treasuries on September 2. The bank’s last public dollar bond — a $500m 5.8 year trade in March — priced at 300bp over underlying Treasuries.
Exotic markets
Although the bank still hopes to return to the US dollar market this year, it also plans to continue with its strategy of borrowing in alternative markets. It is looking at potential Indian debuts in several Asian currencies. Rego would not disclose which, but Indian borrowers have never issued in Thai baht, Indonesian rupiah or Philippine pesos, for example.
The bank has a funding target of $1.5bn for the financial year that began in April, although this mix also includes other forms of borrowing such as syndicate loans. Of this, the bank has fulfilled $200m in private placements so far in dollars and renminbi. The bank raised $890m in the last financial year ended March 2013.
“The dollar bond market gives you size as well as longer tenors. The exotic markets or the non-G3 markets give a smaller size and also lower maturities so it helps to mix and match these various markets,” according to Rego. “We prefer to be more frequent issuers rather than making one chunky deal in a year because we don’t want to have any carrying cost and want to synchronise more closely to our borrowings.”
Yet the diversification of its bonds across a range of currencies has served the bank well. IDBI was able to save about 20bp compared to dollar funding when it printed its first dim sum bond in November 2011, a Rmb650m ($106m) three year deal that priced at 4.5%. It shaved a similar amount in funding costs when it sold India’s first Singapore dollar-denominated bond in August 2012, issuing a S$250m ($196m) three year ticket at 3.65%.
“Our objective is to get cheaper funding on a swapped basis in dollars than what we have got in the dollar markets directly,” said Rego.