World Bank Revives “Curry” Bonds
News that the World Bank is set to issue as much as USD4.3bn in rupee bonds has revived talk of the viability of a so-called Curry bond market.
However, while issuance in rupees may make sense for the World Bank, because it is expected to use the proceeds to lend in the same currency, it makes less sense for other potential foreign issuers.
The World Bank confirmed last week that it was planning to issue USD4.3bn over the next three years in the local Indian market as a way to boost its lending capacity to the subcontinent.
The institution’s exposure to India is reaching its limit of USD17.5bn. However, as it raises local cash and passes it on to the government, it will be able to boost that number to almost USD22bn and maintain its current pace of lending to India at USD4bn a year.
There was only one bond from a non-Indian entity and that was in 2004 when the Asian Development Bank sold a 10-year INR5b n (USD110m at the time) paper at 17bp over the government securities for a yield of 5.4%.
When the deal priced, the market expected similar deals to do the same. The IFC and the World Bank probed the market and created local shelf registrations, but funding levels did not make sense and both backed out.
Unfortunately for proponents of a Curry bond market, the dynamics that stopped such deals taking off years ago remain largely unchanged.
For instance, one banker in India calculated that, if the World Bank was to issue a rupee deal right now, it would probably have to pay a level of around 50bp-60bp over Indian Government bonds, even though its credit quality is better than Baa3/BBB- rated India.
Assuming it followed the ADB’s 2004 trade and sold a 100-year paper, it would translate to a yield in the 9.1%-9.2% area.
“Local investors may have limited incentive to buy bonds of multilateral agencies in rupees unless their investment regulations are suitably amended. Currently, rupee bonds of multilaterals are classified in the same bucket as locally triple-A rated corporate bonds issued by state-owned entities that offer much higher rates to investors. Investors would be able to buy multilaterals at finer spreads in case these are classified in the same bucket as State Development Loans and/or Special Bonds,” said Shameek Ray, head of capital markets, I-Sec PD.
As the rupee is not deliverable, Curry bond issuers will not be able to make a currency swap onshore. If they opted for an offshore synthetic swap using non-deliverable forwards, the 9.1% that the World Bank would have to pay is equivalent to some 310bp over Libor.
Local regulations also mean banks cannot use World Bank bonds – or other Curry bonds – for capital or liquidity purposes, further denting their appeal to local investors, as Reuters stated.
Therefore, the main interest for them to hold such paper will be for repo purposes, although banks and other investors will, undoubtedly, enjoy the diversification and the pick-up on Indian Government bonds.
While foreign investors may well appreciate the extra return for holding such bonds (relative to their holdings in the same credit elsewhere), they have limited access to the rupee bond market.
In short, with a funding level that does not make sense for most issuers and no great clamour from rupee investors to buy, Curry bonds are likely to remain far less appealing than India’s national dish.
