Indian Lenders' $105 Billion Debt Wall Whets Appetite

(Bloomberg) -- As Indian lenders prepare to refinance the biggest debt maturity for any three straight years in a decade, investors are lining up.

The financial sector, faced with almost 7 trillion rupees ($105 billion) of notes coming due over three years, will drive rupee-denominated issuance, helped by lower bond funding costs and rising demand, says SBI Funds Management Pvt.'s Rajeev Radhakrishnan. Issuance hit a record for the second straight year to 5.1 trillion rupees in 2016 and Edelweiss Asset Management Ltd. predicts that level will be outpaced this year, enough to whet mutual funds' appetite for quality-rated corporate bonds.

“There are no pricing pressures seen for these companies to refinance in the bond market as the supply is in line with the demand,” said Radhakrishnan, head of fixed income at SBI Funds, India's fifth-biggest money manager with 1.3 trillion rupees of assets as of Sept. 30. “Asset managers are getting bigger, hence the demand too will be stronger. We will continue to invest in the sector to the maximum limit allowed.”

Lenders, the dominant borrower in India's bond market since at least 2000, have to repay an unprecedented 1.9 trillion rupees of notes this year, data compiled Bloomberg show. The liability will swell to 2.5 trillion rupees each in 2018 and 2019, the largest bond maturity of any three consecutive years since 2007.

The share from the financial sector in rupee bond issuance is increasing as banks have been slow in cutting lending rates, said Radhakrishnan. The average yield on top-rated three-year corporate notes is at 7.39 percent, 76 basis points lower than a similar maturing loan at the nation's largest lender State Bank of India.

“Bond market participants are not perturbed by the maturity amount at the moment,” said Dhawal Dalal, Mumbai-based chief investment officer for fixed income at Edelweiss Asset, who estimates that rupee bond sales could hit as high as 5.5 trillion rupees in 2017. “We will look to invest in the sector at the opportune time. There is enough appetite.”

Buying Power

Assets under management of mutual funds, the biggest buyers of the financial sector's debt, have risen to an all-time high of 17.4 trillion rupees as of the end of January, data from the Association of Mutual Funds in India show.

Key points on bonds due over three years based on Bloomberg-compiled data:

• Consumer finance segment has 2.32 trillion rupees of notes maturing, the highest in the sector, followed by commercial finance
• About 98 percent of the redeeming notes are denominated in Indian rupees
• The busiest month for redemption this year is March with at least 388 billion rupees of bonds coming due
• About 37% of total maturity in 2018 is due in February, March and April
• About 85 percent of the notes expiring have maturity of up to five years
  
  

IDFC Asset Management Co. expects demand for housing finance companies' bonds to rise further after the Securities and Exchange Board of India last month raised the mutual funds' limit to invest in their debt to 40 percent from 35 percent.

“The investor class is comfortable in investing in bonds issued by the financial sector,” said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset, which oversees 569 billion rupees. “There could be some issuer specific refinancing problem if the credit deteriorates overtime, but there are no refinancing risks seen for the sector as a whole.”

--With assistance from Sheenu Gupta

To contact the reporter on this story: Divya Patil in Mumbai at dpatil7@bloomberg.net.

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Chan Tien Hin