Foreign investment limits complicate efforts to replicate Greenko structure
By Daniel Stanton and Krishna Merchant
SINGAPORE, July 24 (IFR) – Three years after stirring controversy, an offshore financing structure pioneered by Indian renewable energy producer Greenko Energy Holdings is now under threat as foreign investors near their quota limits on rupee bonds.
Greenko last Monday sold $1 billion of international bonds, the biggest high-yield Green bond globally and its third such deal in three years. The proceeds are invested in Indian rupee bonds issued by the group’s onshore Indian subsidiaries, giving the dollar bondholders an indirect claim over the Indian assets if the company folds.
Azure Power and Continuum Wind Energy are also working on similar US dollar offerings. However, those deals may be in jeopardy after the Securities and Exchange Board of India last Thursday put new restrictions on the sale of rupee bonds to foreign investors to prevent a breach of the foreign investment ceiling.
Foreign investors have used 92.7 percent of their corporate debt quota as of July 20, an all-time high, according to data from the National Securities Depository.
Sebi said the issuance of rupee bonds, which come under the corporate bond limit, would temporarily cease until the utilisation rate fell back to below 92 percent. If it goes above 95 percent, investors would have to bid in an auction for the remaining capacity.
“Azure and Continuum will be affected because they have to take stock of available limits, or else the deals cannot happen,” said the head of capital markets at a foreign bank.
Bookrunners on the deals said on Friday that nothing had changed, but that they were evaluating Sebi’s announcement to see whether anything needed to be addressed.
“The deal is still on track and we have been told to maintain course,” said a bookrunner.
MAINSTREAM TOOL Indian companies face tough restrictions on external commercial borrowings, which effectively shut lower-rated companies out of the offshore markets – either in US dollars or rupees. The Reserve Bank of India’s caps on borrowing costs stand at 300 basis points over six-month Libor for three to five-year debt, 450bp over five years, and 500bp for 10 years or more.
With US dollar six-month Libor around 1.45 percent mid-week, that meant an Indian issuer could pay a maximum yield of 5.95 percent for a five-year dollar issue – no problem for an investment-grade issuer, but more challenging for high-yield credits.
The yield cap is no longer a problem for Greenko, which priced a $350 million five-year non-call two bond at 4.875 percent and a $650 million seven-year non-call three at 5.25 percent, as its yield has compressed since its first issues. However, the structure is still useful as it allows a wider range of Indian high-yield issuers to consider access to the international debt markets.
“RBI yield caps – or all-in price ceilings – are for US dollar bonds issued by Indian corporates. In this structure, the US dollar bond issuer is an entity incorporated outside India,” said Abhishek Tyagi, a senior analyst at Moody’s.
When Greenko first used the structure in August 2014, the Reserve Bank of India spoke to bankers on the deal and issued a statement warning companies against circumventing its restrictions on offshore borrowings, although the central bank never named Greenko specifically. After that initial uncertainty, however, it seems the structure has been accepted into the mainstream.
“Greenko has used this structure to issue US dollar bonds twice before – August 2014 and August 2016 – thus there is no ban on this structure,” said Tyagi.
When Greenko issued its first bond, the RBI was thought to have been concerned of a build-up of offshore liabilities as a result of Indian entities guaranteeing overseas debt.
However, in Greenko’s deal on Monday and for Azure Energy’s planned issue the guarantees are from entities in Mauritius. Continuum Energy’s parent, which is expected to provide support but not a full guarantee, is based in Singapore. On paper, the RBI has no jurisdiction to intervene.
A structure used in February by ReNew Power Ventures looks unlikely to be repeated, however. Mauritius-based SPV Neerg Energy issued $475 million of five-year non-call three bonds at 6 percent and used the proceeds to subscribe to offshore rupee bonds issued by India-based ReNew. The offshore bonds are secured against the shares of the issuer and the Masala bonds, but the structure is short of an onshore guarantee.
“We understand that the regulator does not have issues with the Greenko structure (with offshore parent, guarantor and issuer), but is concerned more with thinly capitalised companies that are trying to circumvent the guidelines,” said Abhishek Dangra, analyst at S&P. “Orphan SPVs by definition have no linkages to the Indian parent and may be thinly capitalised.”
Neerg has no business other than investing in the bonds and it is not a subsidiary of ReNew, whereas Greenko’s offshore vehicle is a registered foreign portfolio investor and is therefore allowed to buy onshore rupee bonds. Neerg is not an FPI so it had to subscribe to Masala bonds.
Under rules announced in June, new Masala bonds must have coupon rates no more than 300bp above the government curve and minimum maturities of three years, rising to five years if the issue is over $50 million.
“The new RBI circular in June in some ways rules out or makes more difficult the orphan SPV structure used by ReNew. As per our understanding, a company following that structure would need to go through the RBI approval process and meet the Masala yield cap,” said Dangra.
“If offshore bondholders are taking currency risk, the RBI may not be worried, but if the Indian entity is exposed to unhedged currency risk, the RBI may be concerned.”
So far, all the companies attempting to issue offshore dollar bonds backed by rupee bonds have been in the renewable energy sector, leading some to question whether the regulator is showing some flexibility due to the government’s push to develop clean power.
“Issuance has been restricted to the renewables space, and I don’t know if that is a comfort to the RBI because they have been silent,” said an analyst. “It’s not like every company has been trying to do this.”