(MENAFN- Gulf Times) Convertible bond sales in India have come to a grinding halt as investors shun debt linked to the world's worst-performing stock market.
Companies haven't issued a single note that can be exchanged for equity this year, the first complete drought since the same period of 2013, Bloomberg data show. Convertibles from the nation have returned 2.1% over the last six months compared with an average gain for the region of 9.5%, according to Barclays indexes.
The slump in stocks and convertible offerings reflects an economy struggling to respond to Prime Minister Narendra Modi's stimulus policies. Rising soured debts have curbed lending growth while red tape delays ambitious plans to improve transport and power networks. Corporates are instead turning to dollar bonds, seeking to get in before the US Federal Reserve starts raising borrowing costs.
"The lack of new convertible bonds reflects the cut back in capital expenditure by Indian companies, especially given the stress in the infrastructure and power sectors," Mehul Sukkawala, a Singapore-based analyst at Standard & Poor's said. "There's also very low refinancing needs because most of the convertibles issued in 2007 would have already matured, or been restructured or refinanced over the past two years."
Bharti Airtel paid its lowest coupon ever for US currency bonds when it raised $1bn earlier last week, bringing total foreign-currency sales from India this year to $7.2bn. The securities were priced at a spread of 210 basis points, the tightest over Treasuries by an Indian private sector investment-grade issuer since 2010, when Reliance Industries Ltd sold $1bn of 4.5% 2020 debentures at a 205 basis-point premium.
The dollar-denominated credit market is going to remain the more attractive option until there's more clarity as to when the Fed plans to raise interest rates for the first time since 2006, according to Schroder Investment Management. Fed Chair Janet Yellen said on May 22 she expects to increase rates this year if the economy meets her forecasts for a rebound. US currency Indian bond yields touched 4.16% on April 17, the least in JPMorgan Chase & Co index data going back to 2005. They averaged 4.56% June 4.
"There's a window that's shutting fairly quickly for companies to issue straight bonds," said Dorian Carrell, a Singapore-based fund manager at Schroder Investment, which has some $10bn of assets under management in Asia. Indian companies will begin tapping the convertible debt market again once US borrowing costs start to rise, Carrell said.
India's benchmark S&P BSE Sensex Index has declined 2.6% since December 31 versus a 7.7% gain in the MSCI AC Asia Pacific Index and a 52.8% rise in the Shanghai Stock Exchange Composite Index. Over the past three months in US dollar terms it's down 11.2%, the worst in the world.
CLSA Asia-Pacific Markets lowered its year-end target for India's local share gauge by 3% to 28,500 June 3, citing a slower-than-expected economic recovery in the second half. Reserve Bank of India Governor Raghuram Rajan said June 2 that corporate results have been quite weak.
"The performance of India's stock market has been disappointing," said Skander Chabbi, who oversees about ‚¬5bn ($5.7bn) as the Paris-based head of convertibles at BNP Paribas Asset Management. "There's very little interest from investors in junk credits and given the fact stronger credits can achieve better financing costs by issuing straight bonds, equity-linked debt isn't of interest to them."
A slump in the bonds of Jaiprakash Power Ventures has also put a "big dent" in the country's convertibles market and shaken investor confidence, BNP's Chabbi said.
The electricity generator entered into a standstill agreement with bondholders in February regarding its $175.3mn of convertible notes outstanding, which were to mature that month. In March it extended the debt's maturity to February 2016 and put an instalment-based redemption plan in place, promising to pay $25mn on March 31 and a further $75mn upon receipt of proceeds from the sale of some of its power projects.
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