Indian Railways plans Dollar Bond

Today Indian Railways sells more debt to expand its network as the country steps up efforts to improve transport infrastructure that has thwarted steps to counter the worst economic slowdown in a decade.

Mumbai: Indian Railways’, India’s largest state-owned public transport system is returning to the international debt market after a year as borrowing costs fall from a 19-month high, setting the stage for the first offering from the country since July.  Indian Railways got approval from its board in Aug to borrow $1 bn abroad by March 2014, as it seeks to upgrade its network.

Indian Railway Finance Corp. Ltd (IRFC), the funding arm of Asia’s oldest rail network, has hired banks including HSBC Holdings Plc. and SBI Capital Markets Ltd to arrange meetings with investors for a foreign-currency bond sale, Managing Director Rajiv Datt said. The New Delhi-based company is also seeking an overseas loan, as ONGC Videsh Ltd has hired banks to arrange a $1.5 billion facility.

Indian Railways, which carries 23 million passengers every day, got approval from its board in August to borrow $1 billion abroad by March 2014, as it seeks to fund a $225 billion plan to upgrade the world’s third-biggest rail network. The average yield on Indian dollar debt dropped 62 basis points from a 5 September peak to 5.90%, JPMorgan Chase and Co. data show, after the US maintained stimulus that’s buoyed emerging markets. The rate on Chinese securities fell 32 basis points to 6.15%.

“Investors are of the opinion that uncertainties are behind us and soon risk appetite and liquidity will return to the markets,” Koen Vanderauwera, a bond fund manager at KBC Asset Management SA in Luxembourg, which holds more than $100 million of Indian corporate notes, said in a telephone interview on 4 October. “A borrower with strong fundamentals such as IRFC is in demand and would ride on the prevailing market sentiment.”

Bond drought

Businesses in Asia’s third-largest economy have deferred or scrapped dollar bond plans since Indian Oil Corp. Ltd’s $500 million issue in July until now as concern the US Federal Reserve will pare asset purchases triggered a fund flight from developing-nation assets. The country’s largest state refiner made last quarter’s sole offering, compared with $4.8 billion of sales in the prior period and $6.3 billion in the first three months of 2013, data compiled by Bloomberg show.

The average rate on local firms’ overseas debt jumped 92 basis points in August in the biggest increase since September 2011, according to the JP Morgan index. The yield on Indian Railway’s 3.417% dollar notes due October 2017, issued a year ago, surged to 5.10% on 5 September from 3.22% at the end of 2012, according to data compiled by Bloomberg. It has since declined to 4.45%.

The extra yield on emerging-market dollar bonds over US Treasuries has decreased to 328 basis points from this year’s high of 376 in June, according to JPMorgan data.

Positive outlook

“The spread contraction is an indication of the positive outlook and easing risk aversion after the Fed decision to maintain the pace of its debt buying,” Sergey Dergachev, Frankfurt-based senior portfolio manager at Union Investment Privatfonds, who manages $8.5 billion of emerging-market debt, said in a phone interview on 4 October. “We are anticipating an increased supply of debt from emerging markets in the short term and a significant contraction in spreads.

Overseas rates are retreating at a time when those at home are rising, making foreign capital attractive again.” Reserve Bank of India governor Raghuram Rajan unexpectedly boosted the benchmark repurchase rate on 20 September by 25 basis points, or 0.25 percentage point, to 7.5% in the first increase since 2011 to counter inflation. He cut the marginal standing facility rate to 9% from 9.5% on Monday to ease cash supply, the second reduction in less than a month, scaling back an emergency step taken in July to buoy the rupee.

Railway expansion

Top-rated five-year rupee company bonds pay 9.54%, data compiled by Bloomberg show. The average yield on Indian dollar debt is 5.9%, according to JPMorgan data. Ten-year local-currency government bonds in the country pay 8.48%, compared with 2.63% in the US and 3.97% in China, according to data compiled by Bloomberg.

Indian Railways is selling more debt to expand its 65,000-km (40,937 miles) network as the country steps up efforts to improve transport infrastructure that has thwarted steps to counter the worst economic slowdown in a decade.

The rail ministry has proposed investments of Rs.14 trillion by 2020 to expand and modernize its network. The plan will be funded via internal cash, borrowings and collaborations with companies, it said in a December 2009 document.

The nation, which has added an average of 180km of railroads every year since independence in 1947, plans to add 3,300km of freight railways by 2017. China aims to expand its network by 29,000km to 120,000km in the five years ending 2015.

Shrinking share

Indian Railways’ share of freight movement in the country has tumbled to 35% from 89% in 1951, as network expansion failed to keep pace with requirements and as surging highway construction boosted road haulage. The nation added about 50,000% of highways since 1999, according to the National Highways Authority of India.

“Emerging markets are unlikely to recover soon from last quarter’s rout as demand for riskier assets remains weak, according to Aquarius Investment Advisors Pte. Foreign funds will be wary of buying Indian bonds ahead of next year’s national election,” A.S. Thiyagarajan, a senior managing director at Aquarius Investment, which oversees about $300 million, said in a phone interview on Monday from Singapore.

While the rupee has rebounded almost 12 percent from a record low of 68.845 per dollar in August, Rajan doesn’t expect it to go back to levels before the Fed signalled in May its plan to cut stimulus, triggering outflows from developing nations. The currency rose 0.3% to 61.6350 per dollar on Tuesday, while the yield on the 7.16% government bond due 2023 slid 20 basis points to 8.48%.

‘Watch list’

Bond investors do not favour emerging markets, he said. Indian bonds are not at all in favour. While the rupee has definitely improved, nobody’s betting it is going to go to 55. Until elections, India will be on the watch list of investors.

Indian Railway’s bond-sale plan comes as the risk on Indian debt declines. Credit-default swaps insuring the bonds of State Bank of India, a proxy for the sovereign, against non-payment for five years have fallen 59 basis points from a 14-month high of 372 on 20 August, according to data provider CMA.

“Large public sector companies are looking to access the global bond markets and are timing their entry so that they can borrow at attractive levels,” S.J. Balesh, a Mumbai-based senior director at IDFC Ltd, said in a phone interview on Monday. The rally in Indian credit is also more driven by the fact that the tapering has been postponed by the Fed and issuers are looking at an opportune time to borrow.

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