Masala Bonds: Yes you heard it right !!

Masala Bonds: Yes you heard it right !!

Housing Development Finance Corp (HDFC) has raised INR 3000 crore by issuing masala bonds; the first company to do so since the RBI green-flagged it in September last year.

Here is all you need to know about it:

What exactly are masala bonds?

These are rupee-denominated borrowings by Indian entities in overseas markets. Usually, while borrowing in overseas markets, the currency is a globally accepted one like dollar, euro or yen.

What is the advantage of borrowing abroad in rupees?

Companies issuing masala bonds do not have to worry about rupee depreciation, which is usually a big worry while raising money in overseas markets. If the rupee weakens by the time the bonds come up for redemption, the borrower (company) will need to shell out more rupees to repay the dollars.

Is that a big enough advantage?

Surely yes as quite a few Indian companies that had raised money abroad in 2007 by issuing Foreign Currency Convertible Bonds (FCCBs) found themselves in a soup when the rupee depreciated sharply following the global financial crisis. Didn’t understand how??

Suppose a company raised 100 USD through FCCBs in 2007 when foreign exchange was INR 55/ USD (assume). Total money raised in INR terms is 5500. Now, at time of maturity which was post 2008 financial crises, the rupee had weakened, let’s say, foreign exchange at time of maturity is INR 60/ USD. So, the company has to arrange for INR 6000 to repay 100 USD at time of maturity. Therefore, an adverse impact of INR 500 due to domestic currency depreciation.

If you raise money in INR you have to repay in INR. No risk of currency depreciation!!

What is in it for the buyer of the bond?

The buyer will earn a higher yield (coupon rate) to compensate for the risk of currency depreciation.

What is the tenor and coupon rate on the HDFC Masala bonds?

The bond bears a fixed semi-annual coupon of 7.875 percent per annum and has a tenor of 3 years and 1 month. The bonds have been issued at a price of 99.24% of the par value and will be redeemed at par. The all-in annualised yield to the investors is 8.33 percent per annum.

Is it first a first attempt to sell masala bonds?

This is not the first time that an attempt is being made to sell masala bonds. In 2015, both HDFC and state-owned power generator NTPC scrapped their plans after international road shows where investors were demanding higher premium to buy these bonds due to the inherent currency risk. Bankers were lobbying for the removal of the withholding tax of 5 per cent on the interest payment and to permit Indian institutions to buy these bonds in the overseas market to lessen the fear of liquidity. However, they failed to get it done!!

Will the bonds be traded?

Yes, but on the London Stock Exchange, not in India. But any global turmoil in financial markets may upset its plans.

Will there be more such bond issuances by other companies?

According to few industry experts and the bankers to the HDFC issue — post Brexit, both Asian and European investors are hunting for yield and masala bonds seem to be offering them an attractive yield pickup.

Underwriters and lead arrangers for these bonds- Axis Bank, Credit Suisse and Nomura