(Bloomberg) -- Offshore bonds volumes from India are set to gather pace after a banner year as companies tap the lowest borrowing costs in a decade to pay for buying assets locally and abroad.
That’s the view of Citigroup Inc., which forecasts sales of debt denominated in U.S. dollar, euro and yen in 2018 to be as good as last year when issuance totaled $15.6 billion, the highest in three years.
“Banks are talking with more companies now for acquisition and capex funding than in the past two to four years,” said Neville Fernandes, head of debt capital markets for India at Citigroup, the second-largest arranger for so-called G3 bonds locally in 2017. “Several companies are evaluating acquisitions with a wide range of objectives -- acquiring global market share and capacity, buying front-end distribution in growth markets, acquiring intellectual property or natural resources as commodity prices rise.”
Indian firms have also become more ambitious globally. Hindalco Industries Ltd. made a non-binding offer through its U.S. unit, Novelis Inc. for U.S. aluminum maker Aleris Corp., people with knowledge of the matter said earlier this month. A deal could value Aleris at about $2.5 billion including debt, the people said, and likely help revive cross-border purchases by local firms from a eight-year low of $4.25 billion.
The recent upgrade in India’s credit rating by Moody’s Investors Service has helped reduce costs. Spreads over Treasuries for Indian dollar bonds have fallen to 151 basis points, the lowest since 2007, according to ICE BofAML index data. Still, India remains a small player in the G3 bonds market that’s dominated by Chinese firms, which raised an equivalent of $215 billion last year.
“Global investors want more of India,” said Fernandes. “While liquidity continues to remain strong in emerging markets and rates have been low, the scarcity value attached to Indian bonds is extremely high.”
Here are some highlights from his interview in Mumbai:
What will drive demand in 2018?
- “The deal flow will be driven by a variety of factors such as locking in low-financing costs. Extension of debt maturities and introducing operating flexibility due to lighter financial covenants are the other key objectives of several issuers.
- Citi is in talks with state-run companies, financial institutions and corporates, “who are actively evaluating the market across a variety of structures -- senior secured or unsecured bonds, bank capital and corporate perpetual securities.”
Are companies looking to secure acquisition financing?
- “At Citi, we’re engaged with several companies on a wider spectrum of financing needs across capex and acquisition financing.
- “Inbound and local acquisition financing interest remains strong, with healthy activity in industrials and telecom. Onshore distressed acquisition financing is another area that is rapidly evolving.
- “Metals and mining will be interesting for M&A as the commodity cycle picks up.”
What is your outlook for issuance from lenders this year?
- "There are $5.35 billion of Indian bank senior G3 bonds across nine issuers which are to be refinanced or redeemed in 2018.”
©2018 Bloomberg L.P.