Capital markets take a break for the summer - at least that has always been the received wisdom. In the run up to August, borrowers wanting to get a deal away before the summer lull rush to the market knowing that they will be hard pressed to get an investors’ attention during the summer months.
But the success of India’s banks in the debt capital markets this past few weeks has turned this wisdom on its head. Rather than struggle to get interest for their bond issues, India’s banks have been able to come en masse to the market having been largely absent most of the year.
India’s banks have raised US$3.4 billion this year, of which US$2.9 billion or 85% was issued since July 25. State Bank of India (SBI) kicked off this summer sale with a US$1.25 billion 5-year deal. Then on August 13, India Overseas Bank (IOB) sold US$500 million of a six-year bond, with ICICI Bank and Union Bank of India following on subsequent days with their own bond issues.
And these deals were lapped up by investors. IOB secured an order book of US$5.5 billion for its bond while ICICI drew about US$5.7 billion of demand for its dollar offering. The others were similarly oversubscribed.
And there looks to be no let up. Axis Bank, which was the first Indian lender to tap the international debt market this year in February, is returning this week to the tap that US$500 million five-year bond for an additional US$200-US$300 million.
This success is also prompting India bank borrowers to diversify away from US dollars. IDBI Bank is set to become only the second India lender to issue bond in Singapore dollars following a roadshow last week. DBS, HSBC and Standard Chartered are working on the three-year deal which has a price guidance of 4%. Only ICICI has previously issued in the currency.
In some ways the success of these bonds is counterintuitive. Indian bank credit does not seem like the best investment right now. The country is on negative outlook with Fitch and Standard & Poor’s (S&P), and a downgrade would see it move to junk status if it is unable to get on a surer fiscal footing. And with the exception of Axis Bank and ICICI, all the banks which have issued bonds this year have some degree of state ownership. Meanwhile, Indian banks are at risk from rising non-performing loans in large number of industries with S&P saying they are the biggest threat to the nation’s lenders.
Yet the chance to get hold of an investment yielding 400 basis points above US Treasuries is proving irresistible to investors and the hunt for yield has been one of factors behind the record bond issuance in Asia this year.
The success of India banks is in part to the canny timing of their deals. It has been a crowded market for most of this year. Record year-to-date volumes for Asia Pacific debt has meant that at periods investors have been overwhelmed with deals and issuers have had to fight for attention.
By coming to the market in the summer, India banks have had bond investors to themselves. In a more active market place, these credits may not have received such a rapturous reception, but in the absence of many other high yielding US dollar issuers, Indian banks have been able to mop up funding.
This strategy is not without its risks. The last few summers have been characterised by the ongoing eurozone debt problems derailing what activity there was following negative news out of the region. Last year, this negative sentiment hampered bond issuance for the last four months of the year. But in the absence of any major economic shocks, this summer is proving to be fertile for Indian borrowers.
The test for Indian borrowers now is whether second tier banks less familiar investors can benefit from this wave of funding to bring their own issues. Indian banks across the board have a need to access US dollar funding but issuance remains largely confined to the larger state-backed borrowers.
Indian corporates also remain largely absent from the international debt markets, despite many of them being world leading companies in their sectors. At a time when investor sentiment is positive on India debt, some of the bigger more established names should take the opportunity to test the appetite of bond investors especially as onerous restrictions on foreign investors wanting to access the rupee debt market means many stay away.
In that case, India’s success in the bond market this summer may prove a shrewd move for more than just the banking sector.