HDFC Bank prices 7-year masala bonds at 8.1 per cent

HDFC Bank has priced its seven-year masala bonds at 8.1% to raise $350 million, investment bankers close to the deal told FE. A masala bond is a rupee-denominated bond issued in the overseas market. This is the first masala bond offering by HDFC Bank. The initial price target on the issue was at 8.15% which got compressed by five bps by the time of final pricing. “There were 40 plus investors in the issue consisting of asset managers, private banks, long-only funds etc. The issue was oversubscribed by close to 1.5 times,” said a banker close to the deal. Moody’s Investors Service has assigned a Baa2 rating to HDFC Bank’s proposed masala bonds. The bonds are issued under the bank’s $3-billion Medium Term Note (MTN) programme and will be listed on Singapore Exchange Securities Trading, Moody’s said, adding that the rating outlook is stable. It is almost after a period of five months that a major quantum is being raised by an Indian issuer through masala bonds. The biggest problem in this space is the withholding tax which adds to the overall cost. For example, for a masala bond yielding 8%, the withholding tax is likely to add another 40 bps to the cost, investment bankers said. “The withholding tax usually takes the overall cost of borrowing higher than what an issuer could have received in the domestic INR market,” said a banker.

The last major issue was seen in October when the Indian Renewable Energy Development Agency (IREDA) issued green masala bonds to raise close to $300 million. This was the first issue after the Securities and Exchange Board of India (Sebi) in July halted issuance of masala bonds till foreign portfolio investors’ (FPI) investment in Indian corporate debt fell below 92%. The issuances commenced when the Reserve Bank of India (RBI) placed these bonds under external commercial borrowing norms by separating it from the FPI investment limit in corporate debt.

Unlike earlier, when these bonds were introduced, a prospective issuer now needs the central bank’s approval to borrow through this route. The all-in-cost ceiling for such instruments has also been set at 300 basis points over the prevailing yield of central government securities of corresponding maturity. As a result, lower rated firms that do not command a tight pricing are unable to tap this segment. Since the first masala bonds were issued in July 2016, Indian firms have raised more than $3.5 billion through these instruments.