HDFC Raises Rs.3000 Crore Via Masala Bonds Issue

They could save a lot currency blushes for Indian companies…

The recent raising of Rs.3000 crore by HDFC through the issue of Masala Bonds has brought the spotlight back on this product. These products were permitted by RBI in September 2015 and HDFC has actually been the pioneer in raising money through Masala Bonds. So what exactly are these bonds and what are the advantages?

All about Masala Bonds…

Normally when an Indian company borrows globally, it has to borrow in one of the hard currencies like the US$, UK£, Euro or the JP¥. These are called foreign currency denominated bonds. Normally bulk of such borrowings were denominated in US$ as that was the most popular currency. A dollar denominated bond means that the borrower has to repay the money in dollars. Therefore the borrower was always exposed to the currency risk. That means if the rupee depreciates against the US$ (as has traditionally been the case), then the liability in dollar terms actually goes up. Masala Bond, on the other hand, is a rupee denominated bond where the repayment of the principal and the intermediate interest payment has to be done in rupee terms. Such Masala bonds are used to raise money globally in rupees. Masala bonds are normally listed in one of the global markets like London. The protection from currency risk is the biggest advantage for the Indian borrowers.

Understanding currency risk…

To understand the importance of currency risk, one needs to understand the situation back in 2008. Most Indian companies had raised money through dollar denominated bonds to fund their internal requirements. When the Lehman crisis struck, the INR depreciated sharply against the dollar by about 10%. Since most of these companies did not have any dollar earnings and had also not hedged their dollar liabilities, many borrowers were almost pushed to the brink of bankruptcy. On the other hand, Masala Bonds being rupee denominated saves these blushes since all Indian companies have rupee earnings and thus they will have a natural hedge.

Why would investors buy it?

At the end of the day, it is all about higher yield. The HDFC Masala Bond has a coupon of 7.875% and since it is issued at a discount 0.76%, the YTM works out to 8.33%. This is a very attractive return for global investors, who are suffering from nearly $11 trillion worth of bonds carrying negative yields. Masala bonds can give them the much needed alpha. Of course, the real reason Masala bonds could become popular is that the INR has been fairly stable or gradually calibrated downward. That makes the INR more predictable. For Indian companies, it surely saves them the currency blushes! ©

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