Capitalising on regulatory changes that have breathed new life into Indian high-yield markets, Deutsche Bank is leading the way on non-bank financial company issuance. Edward Russell-Walling reports.

Sameer Gupta and Ed Tsui

Sameer Gupta and Ed Tsui

The Indian high-yield bond market, still in its relative infancy, has been invigorated by changes in borrowing regulations, and is now the second largest in Asia after China. Deutsche Bank has already brought six inaugural Indian high-yield deals to the international markets this year, including issues from three non-bank financial companies (NBFCs).

“The high yield market has evolved since 2014,” says Sameer Gupta, head of India debt capital markets (DCM) at Deutsche Bank. “Before then there was a limited number of issuers.”

Since then, Indian high-yield issuance has ebbed and flowed, with 2014 volumes of $4.9bn falling to $1.1bn in 2015 and $2.1bn in 2016, according to Bloomberg, before rising once more to $4.9bn in 2017. In 2018, they fell back to $1.3bn. In 2019, however, issuance received a boost from the central bank, Reserve Bank of India (RBI), which has eased some of the regulations governing what it calls “external commercial borrowings”.

“The central bank has reduced the minimum average maturity for borrowing down from five years to three years,” says Mr Gupta. “It has also vastly increased the universe of eligible borrowers.” The RBI has made it easier to refinance rupee debt in the external commercial borrowings market, while lowering its pricing cap from 500 basis points (bps) over a benchmark rate, such as Libor, to 450bps.

Generating interest

The effect on Indian bond issuance in general has been electric. In high yield, by early November 2019, year-to-date volumes had already reached $8.7bn, almost double the previous annual peak. 

The market has been of particular interest to certain NBFCs. Indian shadow banks have had an anxious year. The collapse in late 2018 of IL&FS, a highly rated NBFC that specialised in infrastructure lending, made it much harder for the sector to raise local funding. More recently, the central bank has had to restrict lending or withdrawals at a number of other institutions.

“The NBFCs have been stressed because they are competing with banks and seeing low returns on their portfolios,” says Mr Gupta. “They have been borrowing short term in the commercial market and lending long term, and when the liquidity crunch hit it came with a trust deficit.”

After the IL&FS drama, mutual funds liquidity for NFBCs went down, and there was clear segmentation between good quality and bad, adds Mr Gupta. “Funding for most of the smaller NFBCs dried up, though it was still there for the bigger, professionally run institutions. But the sector itself now realised the importance of funding diversity,” he says.

International first

In February 2019, Shriram Transport Finance Company became the first Indian NBFC to come to the international high-yield market, with Deutsche Bank as a joint global coordinator. Shriram is the largest commercial vehicle financier in India, with assets under management of $14.9bn at the end of 2018 and a 25% share of the so-called ‘pre-owned’ commercial vehicle finance market.

During a January non-deal roadshow, the company had received enough constructive feedback to press ahead with the transaction. It then met about 50 investors in Singapore, Hong Kong and London before launching a three-year senior secured Reg S deal with initial price guidance of 6% area. The final order book was more than $1bn, and the issuer was able to print a $400m deal with a coupon of 5.7%. Fund managers took 81% of the issue, with banks allocated 13% and private banks and others 6%. Geographical distribution saw 67% go to Asia and 33% to Europe, the Middle East and Africa (EMEA).

The bond was not only Shriram’s high yield debut but also India’s first US dollar high yield deal for more than a year, thereby reopening the market for further issuance from the region. The bonds were secured via an exclusive first charge over specified receivables. 

Shriram judged the issue such a success that it returned with another in April, this time a Reg S/144A deal – the first of its kind from an Indian NBFC. Having kicked off with price guidance of 6.125%, the 3.5-year transaction finally priced at 5.95%, raising $500m. “Both deals were extremely well received,” says Mr Gupta. “International investors saw the quality of the balance sheet and liked the professional way in which the liability and asset profile was managed.” The April issue was later tapped for another $250m.

Delivering debuts

In May, Deutsche Bank was joint bookrunner on another NBFC high-yield debut, this time from Indiabulls Housing Finance. Its business consists of two-thirds of its loan portfolio in retail mortgages, and the balance split more or less equally between loans against property and corporate loans. After a two-day roadshow in Hong Kong, Singapore and London, it launched a three-year senior secured Reg S bond with initial guidance of 6.5%.

Demand was underpinned by Indiabulls’ good track record, robust financial statistics and experienced management team, according to Deutsche Bank, and allowed the pricing of a $350m transaction at 6.375%. Fund managers again took 81%, with 9% going to banks and another 9% to private banks. Asia accounted for 53% of the allocation, EMEA for 37% and the Middle East for 10%.

Unfortunately, Indiabulls has since become a victim of India’s ongoing lending sector crisis. Following trouble at its prospective merger partner, Lakshmi Vilas Bank, and a lawsuit that raised questions about its own lending practices, Indiabulls’ share price has almost halved since October.

In Deutsche Bank’s third and most recent corporate debut deal, it was joint global coordinator, alongside Standard Chartered, for a three-year senior secured transaction from Muthoot Finance. The bulk of Muthoot’s business involves overcollateralised lending against gold, characterised by low default rates.

A senior 144A/Reg S deal was roadshowed in Hong Kong, Singapore, London and New York. “Given the volatility seen in the NBFC sector in India this year, investors naturally had questions about the company’s market position and industry trends,” says Ed Tsui, head of the Asia-Pacific DCM syndicate at Deutsche Bank. “But once we helped them understand the company’s unique gold collateralised lending model and the robust structure of the secured notes, they were keen to gain exposure to a solid company that can give them exposure to India’s fast-growing economy.”

With an order book of more than $1.2bn, the company priced a $450m deal with a 6.125% coupon, having tightened by 25bps from initial guidance. The bond clearly had broad appeal and was evenly distributed across Asia (37%), the US (35%) and Europe (28%).

New structures

Deutsche Bank has also been bringing new structures to the Indian market. In October it was joint global coordinator on what it describes as the first ever bond with a project finance structure, issued by Adani Green Energy. The 20-year senior 144A/Reg S transaction was the first investment grade bond from an Indian renewables utility and the first long-tenor bond out of India in several years. 

The amortising green notes were issued by three Adani subsidiaries under a bankruptcy remote structure, secured substantially by all of the co-issuers’ assets. They attracted a final order book of $2.1bn after guidance was tightened by 37.5bps to 4.625%, and the size was set at $362.5m.

As joint lead manager, the Deutsche team also led India’s first renewables holding company bond. The parent guarantor was established borrower Greenko Energy Holdings, one of the leading independent clean energy operators in India. The issuer was its 100%-owned subsidiary, Greenko Mauritius, also a holding company.

The senior unsecured notes were launched with guidance of 6.5% area, and the deal was finally sized at $350m with a 6.25% coupon. Funds took 94% of the bonds, which were allocated 41% each to Asia and the US, with 18% going to EMEA. The transaction was Deutsche Bank’s fifth consecutive bond mandate for the Greenko Group, which is majority owned by Singapore’s GIC.

Mr Gupta believes that the number of Indian high-yield issuers will continue to increase. “They will see this as a good diversification from the domestic market,” he says. “And from a NBFC perspective, those who establish a good benchmark will have an annual programme.”


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