IFC offers double-digit yields to the brave

Fri Apr 11, 2014 6:31am EDT

* Multilaterals' rupee bonds returned 10.7% since November

* Volatility of the currency has dropped

* Successful transaction may prompt more supply

By Manju Dalal

SINGAPORE, April 11 (IFR) - In a week when a Triple C rated sovereigns like Greece can offer sub 5% yield, the possibility of getting double-digit returns on a Triple A bond may sound like the start of a fairy-tale. Yet, in its drive to create new funding avenues for Indian companies, the World Bank's International Finance Corp has offered just that.

The multilateral lender has just priced a Rs12bn (US$194m) seven-year Indian rupee-denominated bond to yield 8.25% in a deal that topped out a US$1bn equivalent medium-term note programme.

If the 8.25% recently offered seem enticing considering the quality of the issuer, it pales in comparison to the return already achieved by investors who bought the first issue of the series, a three-year bond yielding 7.5% sold on November 18.

Since that date, the rupee has appreciated 3.2%, giving investors a double-digit gain on one of the safest credits in the world.

The bet could have easily moved against investors, though. After years of stability, the seven-day volatility of the Indian currency peaked in September last year at 42%. It has, however, dropped back to its historic range of 3.4%.

"When we launched the programme in November 2013, we were not absolutely sure of the response from investors as, at that time, the markets were very volatile," said Monish Mahurkar, IFC director for treasury client solutions.

"However, we are now very encouraged by the success of our global rupee-linked programme. We plan to seek permission from the Indian Government to extend the programme with a larger limit," he added.

The sale of the first transaction off the programme was not an easy one, the latest transaction was 140% oversubscribed.

"There are a lot of investors, who have mandates to buy only Triple A rated paper and have no access to India," said Viral Bhuta, Singapore-based portfolio manager at UTI International. "The IFC deal bridges this gap."

The performance of IFC's bond may also encourage other multilaterals to come to market with similar securities. Sources said Asian Development Bank was planning an offshore rupee bond sale.

Indian corporations are also examining the possibility of rupee-linked bonds and would offer a much higher yield than IFC, given they are are capped by the sovereign's BBB- rating.

IFC's securities are denominated in Indian rupees, but settled in US dollars, with all principal and coupon payments tied to the dollar-rupee exchange rate. The bonds also allow investors to take exposure to India, without having to navigate the country's byzantine foreign-investor regulations.

"There are many investors who would like to take India exposure and, with Triple A rated IFC providing that, nothing can be better," Bhuta said "How else can you get high single-digit yields on AAA paper?" (Reporting By Manju Dalal; Editing by Christopher Langner and Alex Chambers)

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