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Thursday, January 26, 2012

Savvy NRIs lap up India Inc’s dollar bonds from existing FIIs

MUMBAI: Dollar-denominated bonds of Indian companies are gaining popularity among wealthy non-resident Indians (NRIs) and savvy local investors. These individuals are mopping up such bonds, which are being dumped by foreign investors amid worries that Indian companies could default on their debt repayments in the wake of the slowdown in the domestic economy and squeeze in corporate profits.

Wealth managers said confidence in debt of Indian companies is so low that foreign investors are dumping their bonds at 40% to 60% discount to their original prices. Bank bonds, which bear coupon rates in the range of 4-5%, are trading at 6-6.5% levels in overseas markets. Dollar bonds issued by corporates are currently yielding 7-7.5%.

Indian companies are considered risky overseas because of their lower credit rating, which is driven by the nation's sovereign rating of 'BBB minus'.

"There are worries of debt repayment defaults; also there is a feeling that Indian companies will not do well over the next few quarters. This has resulted in foreign banks and institutions reducing exposure to Indian debt," said Nitin Jain, head - capital markets, Edelweiss Capital Markets.

NRIs and the informed domestic investors are seeing opportunities in such fire sales. They are looking out for papers, especially, foreign currency convertible bonds (FCCBs) that are up for redemption this year. Yields on many such bonds are trading at almost 9% overseas, with those issued by blue-chip companies like Tata SteelReliance Industries and Bharti Airtel at 8.5-9%. Such investments make sense for NRIs because dollar deposits fetch them just 1% to 1.25%.

Much more than returns, dollar bonds eliminate currency risk for NRIs, said Raghvendra Nath, managing director of Ladderup Wealth Management.

"In these times of currency volatility, there's huge risk involved in bringing money to India and investing them in local assets. There's greater comfort for NRIs to invest in dollar bonds and earn higher yields on them," Nath said. These bonds could fetch these NRIs between 5% and 7%, said wealth managers.

For wealthy local investors, such investments are attempts to diversify their portfolio. Most of them are using the Reserve Bank's liberalised remittances scheme route - which allows individuals to invest up to $2,00,000 in foreign assets every year - to invest in these bonds.

"HNIs (high net worth investors) are investing in dollar-denominated bonds to diversify their portfolio. This strategy allows investors to have exposure to a different currency other than the rupee," said Prateek Pant, head of wealth solutions at RBS. "Several FCCBs are currently trading at a significant discount to their issue price. NRIs are cherry picking the well-known names as value buys," Pant said.

Edelweiss's Jain said rich investors invest in dollar bonds to pocket the additional 'carry' value on rupee. "They are hedging the rupee ( futures) before investing in these bonds. They earn an additional 5-6% carry value on rupee along with 6-7% yields on bonds," Jain said.

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