* NTPC leads next wave of offshore financings
By Krishna Merchant
SINGAPORE, May 2 (IFR) - Indian issuers are dusting off
plans for offshore rupee financings after a rebound in the
currency brought so-called Masala bonds back on investors'
State-run power producer NTPC last Tuesday raised
20 billion rupees ($312 million) from five-year Masala bonds at
a yield of 7.28 percent, after Housing Development Finance Corp
set a new Masala milestone with a 33 billion rupees
deal at 7.35 percent earlier in the month.
National Highways Authority of India also began
marketing a maiden issue of Masala bonds to raise up to 50
billion rupees and Mahindra & Mahindra Financial Services
selected six banks for investor meetings.
The stop-start Masala market is attracting renewed interest
as the Indian rupee has strengthened 5.7 percent year to date
against the US dollar.
“Masala bonds are certainly one way to play the currency
view,” said Arthur Lau, co-head of emerging market fixed income
and head of Asia fixed income at PineBridge Investments, which
can invest in both local and offshore rupee bonds.
"The market in general is sanguine about India’s economic
outlook. This, along with a less bullish view on the US dollar
in the near term, provides a more positive view on emerging
market currencies, including the Indian rupee."
Masala issuance failed to live up to initial enthusiasm
following HDFC's debut offering in July last year, and the
resurgence of the format points to growing global confidence in
"Foreign investors that don’t have India access can play the
India macroeconomic story and INR view through the Masala
bonds," said Doug Stephen, Deutsche Bank’s head of private debt
syndication for Asia Pacific.
Masala bonds are in demand even though onshore rupee bonds
offer higher yields. For example, NTPC's five-year Masala was
priced at 7.28 percent, 22bp lower than similar-tenor bonds
onshore which were trading at 7.5 percent.
There is international appeal, though, because Masala bonds
have some investor-friendly features.
Issuers typically absorb the 5 percent withholding tax on
rupee coupon payments, and investors have the advantage of
settling the bonds via Euroclear or Clearstream.
"Investors don't pay withholding taxes on coupons or capital
gain taxes that would normally be payable for Indian onshore
bonds, although these are generally reflected in the lower
coupon of Masala bonds," said Neeraj Seth, head of Asian credit
India has recorded strong foreign portfolio inflows in recent
months, with 510 billion rupees coming into the onshore debt
market since February. Its stock market is Asia's best performer
of 2017, climbing 12.8 percent to April 27.
Rising markets and a stronger rupee point to renewed hopes
of structural economic reforms under Prime Minister Narendra
Modi, whose Bharatiya Janata Party won the Uttar Pradesh state
election last month.
Onshore debt quotas have frequently been under-utilised, but
are now filling up fast. Around 77 percent of the foreign
portfolio investor debt limit was already utilised in government
bonds and 81 percent of the limit was utilised in corporate
bonds as of April 26.
BlackRock's Seth expects demand for Masala bonds to grow
further when the quota available to foreign investors to invest
in Indian government bonds is fully utilised.
However, not everybody agrees about the attractiveness of
the offshore bonds.
"We are not a big fan of Masala bonds," said Leong Lin-Jing,
investment manager in the Asian fixed income team of Aberdeen
Asset Management, which has access to onshore bonds. The returns
on Masala bonds are not enough, she said, since the market lacks
structural investor support, has poor liquidity and a
concentrated investor base, raising the risk of a rush for the
exit when sentiment turns negative.
The currency's recent outperformance may also have left it
overvalued. Sanjay Mathur, chief economist for South-East Asia
and India at Australia and New Zealand Banking Group, predicts
"a modest weakening of rupee as the economy recovers by end of
the year”, from the current levels of 64.11 against the dollar.
Some asset managers also pointed to the renminbi
depreciation in 2015 which led to huge losses for holders of Dim
Sum bonds – another asset class that was driven by investors
hoping for currency appreciation.
(Reporting by Krishna Merchant; Editing by Daniel Stanton and