The first offshore rupee-denominated masala bond issue, anchored by a sub-sovereign entity under its control, has made Kerala the toast among states looking to raise offshore rupee borrowings at competitive rates.

Kerala Infrastructure Investment Fund Board (KIIFB), a statutory body under the State Finance Department, recently closed the masala bonds at 9.72 per cent in London and Singapore exchanges.

Rating agencies S&P and Fitch had assigned KIIFB a long-term foreign currency rating of BB with stable outlook, only a couple of notches below the country's sovereign rating of BBB.

Good augury

KM Abraham, former chief secretary of the state and a whole-time member of the Securities and Exchange Board of India, heads KIIFB, while Sanjeev Kaushik is his deputy.

“A number of states have approached us seeking to know how we got about it,” Sanjeev Kaushik, Deputy CEO, KIIFB, who is also State Finance Secretary, told BusinessLine.

“This is good for the development of the masala bond market. It will increase its supply, interest and liquidity. But the bond exercise needs much (financial) discipline and (fiscal) structuring,” he said.

International rating agencies do not give the ratings easily. They interview the Finance Minister, the Chief Secretary, and the Finance Secretary, among others.

The state budget is analysed deeply. The state's expenditure quality is looked at in detail. One big point about KIIFB that emerged with investors was its management quality.

Fait accompli

“If only a state can put together these elements, they stand a chance. The prep takes a lot of time. We should be proud that we were able to do it." For Kaushik, the KIIFB masala bond is a fait accompli of sorts.

It was during the acute current account deficit crisis in 2013 that the Union Finance Ministry with Raghuram Rajan as Chief Economic Adviser had come up with the idea of masala bonds.

“The hedging costs for foreign currency borrowings were so high in those times. We wanted to facilitate rupee borrowings and make the rupee an international currency.”

Kaushik was Director, Capital Markets, under the Finance Ministry then. Now, as Finance Secretary, Kerala, he is involved in the launch of the first masala bond issue at the state level.

KIIFB's global Medium Term Note programme envisages to raise Rs 5,000 crore, of which Rs 2,150 crore has now been done through the first tranche of masala bonds.

US dollar bonds soon

KIIFB said that they will be seeking further approval for raising resources. “We propose to do a US dollar bond issue this year. Again, we will be the first state entity to do a US dollar bond issue. That will be at a lower rate of interest but given the foreign exchange risk is there, hedging costs have to be factored in, unlike in the masala bond issue. In fact it is because of the high hedging costs last year that we opted for the masala bonds where the exchange risk is borne by the investors. Now that we’ve gone ahead and hit the market with a masala bond issue and the yield curve has been established, we’re in a position to do further issuances,” KIIFB explained.

KIIFB is also looking at a domestic float. It tried it last year but the yields were in a very volatile situation.

“Yields have come down significantly since then. So once market conditions settle, we will go for the domestic float. That’s a comparably quick exercise, and we’re ready,” they added.

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