Indian lenders defer dollar debt sales as funding costs rise

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Banks defer dollar debt sales

Highlights

Canara Bank, Punjab National Bank, and Bank of India halted planned $2.5 billion dollar debt sales due to higher U.S. Treasury yields and increased hedging costs.
All-in dollar borrowing costs for state-run Indian lenders now stand 70 to 100 basis points above one-year rupee funding after a 25 basis point U.S. yield rise and 0.8% rupee depreciation.
Indian lenders raised $13 billion through dollar bonds under the RBI's subsidised hedging window expiring in December, but further issuance awaits improved pricing and funding conditions.

Funding plans stall as offshore borrowing turns costly

As reported by Reuters, Canara Bank, Punjab National Bank and Bank of India had explored raising as much as $2.5 billion through dollar debt under the central bank's subsidised hedging window, but decided not to proceed after market conditions worsened. Bankers familiar with the plans said discussions had started, yet the economics of issuance no longer supported a sale.

The 10-year U.S. Treasury yield has risen by 25 basis points to about 5% over the past two months, while the rupee has weakened 0.8% in the same period. Bankers said that combination, along with a jump in hedging costs, now leaves all-in dollar borrowing costs for a state-run lender around 70 to 100 basis points above one-year rupee funding.

Canara Bank Managing Director and CEO Brajesh Kumar Singh told Reuters the bank chose not to go ahead with its planned dollar bond issue because rates have increased sharply. Punjab National Bank and Bank of India did not respond to Reuters emails seeking comment.

Market pressure and RBI window shape issuance outlook

Heavier supply from Indian lenders has contributed to wider secondary spreads and higher premiums for new deals, while a recent risk-off move across Asian credit markets adds further pressure, according to Lim Ze Hao, associate director for APAC financials at CreditSights. He said some lenders in the pipeline are still likely to return once dollar funding conditions improve, especially because they have an incentive to use the RBI facility before it expires.

The Reserve Bank of India has allowed banks and state-run companies to raise funds overseas and use a subsidised hedging facility between June and December, reducing the cost of managing currency risk. Indian lenders have already raised $13 billion through dollar bonds under the scheme, including $3.5 billion by five state-run banks through private placements and public issues.

Karur Vysya Bank also considered a dollar debt sale but is waiting for better pricing. Managing Director and CEO Ramesh Babu said earlier this month on a post-earnings conference call that the bank may try to conclude a deal in the next month or so if pricing and funding conditions become favourable.

Our earlier report on the jump in long-term U.S. Treasury yields explained how rates above 5% are rippling through the economy by lifting mortgage costs, federal interest expenses and overall financing conditions. It also noted that widening deficits and political gridlock reduce the chances of near-term fiscal relief, keeping pressure on borrowing costs and capital markets.

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