Green bonds are a relatively new concept in the region, with only three other Asian issuers having done a deal in a G3 currency. None were from India, but Yes Bank did sell the country’s first green bond in February — a domestic Rp10bn ($160m) 8.85% five year offering.
India Exim, though, has now put India on the international green bond map and more issuance is expected to follow thanks to the government’s ambitious target for renewable energy.
India has set a target of 175GW of new renewable energy by 2022, which is seven times the country’s current capacity of 25GW. In order to achieve that, India needs $100bn-$200bn of investment, of which 70% will come from the debt market.
“Sometimes you have to take these grand statements with a grain of salt,” said Sean Kidney, CEO and co-founder of the Climate Bonds Initiative, an international not-for-profit organisation that promotes green finance. “But the prime minister has a track record of making things work, so even if India only manages to hit half that target, it’s still going to be an unprecedented achievement.”
While green bonds are unlikely to be the sole, or even the main, source of funding, volumes are still expected to pick up massively. Kidney predicts $5bn of new issuance by the end of 2015.
Many blue chip Indian issuers are contemplating issuing green bonds and Yes Bank is expected to do so again in April, with the International Finance Corporation revealing last month that it will invest up to $50m in those bonds — its first emerging market green bond investment.
Reforms needed
The signs are promising, but for Indian green bonds to really take off, several issues will need to be rectified, say market observers.
“While going to the international bond market for funding, the credit ratings for many Indian corporates are not high enough,” said Vinod Kala, managing director of Emergent Ventures India and lead finance consultant, PACE-D, a joint venture between India and the US to accelerate India’s transition to a high performing and low emission economy.
As a result of their low ratings, many Indian companies are unable to attract investors with deep pockets such as pension funds, insurance companies and sovereign wealth funds.
These accounts tend only to invest in offerings rated AA or above. Indian issuers, on the other hand, are capped by the sovereign’s Baa3/BBB- rating. To make matters worse, those looking to issue offshore are also hampered by an extremely high cost of hedging, which is around 7%-8% for a 10 year tenor.
Indian authorities, though, are aware of these issues and a number of measures are currently being considered.
First on the list is an exchange risk liquidity facility for green bonds, through which the government will provide support by using its reserves. This will help reduce the cost of hedging, especially when the Indian rupee undergoes a period of large fluctuations.
A second solution is for the government to provide guarantees or partial guarantees to green bonds. However, one head of India DCM noted that the government had always been reluctant to provide credit enhancement tools to the private sector, even though it has done so in the past.
One way around that would be for India to seek support from the Green Climate Fund, which provides risk mitigation products, such as guarantees, to green bond issuers. Resolving these two problems could potentially save issuers up to 100bp-250bp, the head of DCM said.
Issues at home
With the international market proving tough to navigate, the other option would be for issuers to turn to the country's domestic market.
“Green bond issuance has been predominantly in G3, but there is increasing interest in local currency issues from issuers and investors for diversification,” said Robert Barker, head of CSR and sustainable investment solutions, global markets, Asia Pacific, at BNP Paribas.
That, however, can also be tough for Indian issuers. Liquidity, or the lack of it, has always been a major problem with the domestic bond market, according to Vijay Chander, executive director in the fixed income unit of Asifma, the Asia Securities Industry & Financial Markets Association.
This lack of trading is down to a variety of reasons, such as the small size of individual bond issues and the lack of large institutional buyers. And of those institutional investors who are present in the local market, most adopt a buy-and-hold strategy, which contributes to the illiquidity.
“The domestic market has low depth while the FII (foreign institutional investments) limits are also small and close to being used up,” PACE-D’s Kala said. “Raising the limit is definitely something the government should consider, because not only will it help with green bonds, it will also deepen the corporate bond market.”
Through the FII scheme, foreign investors are allowed to buy into either Indian government securities or local corporate bonds.
The former’s $30bn limit has already been mostly used up and foreign investors have since turned their attention to corporate bonds, where there is a $51bn cap. That is now more than 70% used, compared to just 30% six months ago.
But in order to entice investor into domestic green bonds specifically, talks are underway to provide the asset class with either tax-free status or a special tax rate. Tax-free bonds are not uncommon in India and are usually issued by government-backed entities, such as the Rural Electrification Corp.
“The government only needs to expand the scope of the current programme to green bonds,” the head of DCM said. “It’s as simple as that.”
Good demand
None of these issues proved a problem for India Exim. The issuer was only looking to raise $250m as that was the minimum requirement for dollar bonds to be included in the Bank of America Merrill Lynch Green Bond Index, but it managed to raise double that amount on March 24 thanks to $1.5bn of bids from 140 accounts.
Joint bookrunners Bank of America Merrill and JP Morgan launched the Baa3/BBB- rated five year bonds at 165bp over Treasuries, which was tightened to 150bp (plus or minus 2.5bp).
Final pricing was fixed at 147.5bp over and the 2.75% five year deal was eventually sold at 99.468 to yield 2.865%. That was in line with its dollar curve as India Exim has a $500m 2.75% 2020, issued in February, that was trading at a G-spread of 148bp.
“Bearing in mind that the issuer had already tapped the market once in February and was coming back so quickly, the end result wasn’t too shabby at all,” a syndicate banker on the deal said.