SINGAPORE, Dec 8 (IFR) - Two failed high-yield bond offerings last week raised questions over investor appetite for lower-rated Indian credit, after a sustained rally in credit spreads appeared to have opened the door for more companies to access the global markets.
Telecom operator Reliance Communications and premium property firm Lodha Developers kept the books open on their maiden offerings for two days before eventually throwing in the towel, blaming poor market conditions.
Investors had concerns that were specific to each deal, but said regulatory risk also played a factor, dealing a blow to hopes that Narendra Modi's pro-business policies would unleash a wave of international financings from India's private sector.
"Indian credits will still attract demand, but the failure of these two deals will definitely give more pricing power to investors," said a buy-side source.
A soft market backdrop was partially to blame, but foreign investors also wanted to be compensated for the risk of the Reserve Bank of India's vetoing the bonds, after it sent a warning last month on using proceeds from offshore bonds for refinancing of local debt.
"Investors get very selective towards the year-end," said Singapore-based Raymond Chia, head of credit research for Asia ex-Japan at Schroders Investment Management. "The Indian credit space is also impacted by the recent RBI guidelines on offshore borrowing structures that are making investors re-examine some Indian high-yield bond structures."
Neither RComm nor Lodha were refinancing local debt, and both had RBI approvals in place for their debut offerings, but this failed to mitigate investor concerns over Indian regulatory risks.
Indian high-yield bonds have struggled since the RBI's November 25 notice against using offshore funds onshore. For instance, IT firm Rolta India has dropped 3-4 points, while Indiabulls Real Estate was down 1.5-2.0 points. JSW Steel, on the other hand, was down 0.75-1.0 point.
RComm announced a US$255m five-year non-call three Reg S-only secured deal last Monday at price talk in the 6.50% area. Bookbuilding was then extended for a second day amid talk of a reduced size, sending a clear sign that the deal was struggling.
Nevertheless, Lodha was confident enough to press ahead with its own five-year non-call three offering on Tuesday in the mid-high 10% range - a decision that surprised investors.
"It was very ridiculous for Lodha to hit the market when the broader market was so soft and with RComm already on the brink of getting downsized," said another buy-side source.
Anil Ambani-owned RComm considered downsizing, bizarrely, on the back of a 10bp tightening on the price guidance to 6.40% but to no avail. The deal had been targeted at a specific size of US$255m because that was the exact amount the company needed to refinance and did not want to increase its debt level.
Lodha, with some anchor investors and a 25-cent rebate for private bank orders, also tried to save its deal, cutting it to US$200m from an initial target of US$350m.
Devil in the details
Lodha suffered from investor concerns about the cyclical Indian property sector, but some also found the company's guarantees on the bonds insufficient.
The proposed notes carried an unconditional and irrevocable guarantee from Lodha and its key subsidiaries, but the initial guarantors accounted for only 40% of the group's consolidated Ebitda. The remaining material subsidiaries were to be added as guarantors within a span of six months, according to a Fitch release.
The agency assigned a B+ rating to Lodha's proposed issue, noting that cash flows were sufficient to service the coupon payments on the paper, even if the additional guarantors were not brought on board.
Some investors were also uncomfortable about the use of proceeds - to refinance a loan that backed an acquisition of property in London.
RComm, meanwhile, has a history of covenant breaches on its loans, which impacted investor sentiment towards its unrated debut, even though the company offered to secure the bonds with onshore assets.
DCM bankers closer to the two offerings claimed the companies would be back soon, even as rival bankers remained sceptical amid reports that the firms would repay their debts with bank loans.
Deutsche Bank and Standard Chartered were on the RComm offering, while Bank of America Merrill Lynch and JP Morgan ran the Lodha issue. (Reporting by Manju Dalal and Lianting Tu, editing by Steve Garton and Daniel Stanton)