Banks spice up 'masala' bonds for better returns

A man counts 100-rupee notes in Kolkata on Aug 30, 2013.
A man counts 100-rupee notes in Kolkata on Aug 30, 2013.PHOTO: REUTERS

MUMBAI/SINGAPORE • Bankers are finding new ways to sell India's "masala" bonds by structuring this rupee-denominated debt issued abroad into derivatives, and then sweetening the deal with leveraged returns of 12 to 13 per cent after fees and hedging.

Unveiled last year, masala bonds are a way to borrow overseas, and an attempt to make the tightly controlled rupee more widely available in global markets.

So far, four Indian issuers have sold a combined 78 billion rupees (S$1.6 billion) of the debt.

Non-resident Indians living in financial centres such as Hong Kong and Singapore are ideal target investors as they are comfortable with rupee debt.

"The immediate interest is from offshore investors who see the good yields available and the opportunity to participate in the India story," said Mr Anand Natarajan, head of strategy and business execution at Fullerton India Credit, owned by Singapore's investment company Temasek Holdings.

Some banks, including Credit Suisse and Nomura, are now adding their own ingredient to the mix after turning about 12 billion rupees worth of the debt from Indian firms HDFC and Adani Transmission into "credit-linked notes" derivatives, according to sources.

Under this arrangement, a bank provides funding of 80 per cent and the investor puts in only 20 per cent to buy the derivative.

After paying for the dollar funding rate of about 1.5 per cent, a bank fee of 50 basis points, and short-term rupee hedging, the eventual landed return for the investor comes to 12 to 13 per cent, thanks to the heavy leverage ratio.

The return is much higher than the nominal 8 per cent or so offered by unleveraged masala bonds and the highest for similarly rated debt, bankers said.

These derivatives are then sold in tranches to non-resident Indians.

"The extent of leverage provided to the investor by the private bank varies and can go up to as high as 5 to 1," said Mr Shantanu Sahai, executive director and co-head of debt capital markets at Nomura.

"This serves to significantly improve the returns for these investors."


A version of this article appeared in the print edition of The Straits Times on September 15, 2016, with the headline 'Banks spice up 'masala' bonds for better returns'. Print Edition | Subscribe