Singapore's AAA cachet spurs 28% gain in India's best junk bond

OCT 23, 20151:48 PM

[SINGAPORE] A bit of AAA-rated endorsement can go a long way for a little-known junk bond issuer.

Dollar notes in India's Greenko Group Plc have gained 28 per cent in 2015 after Singapore investment fund GIC Pte agreed to take full control of one of the renewable energy firm's businesses. It's the best performing high-yield bond in India in a Bank of America Merrill Lynch index of dollar notes that's lost 1.5 per cent this year.

"I'm not sure I would have invested in this company if not for the presence of GIC," said Soren Bertelsen, a money manager in Copenhagen at BI Asset Management, which oversees US$1 billion of emerging-market corporate bonds including Greenko's. "It shows the positive impact of having a strong shareholder."

Singapore's investment sent a positive signal to Prime Minister Narendra Modi, who's seeking to pump US$200 billion into a plan to produce 175 gigawatts of green energy by 2022, almost five times current levels.

Indian junk bonds are clearly divided with Greenko one of just five non-banking notes to gain in the index as metals and oil producer Vedanta Resources Plc slumped 12.3 per cent and Tata Steel Ltd. made no returns amid plunging commodity prices.

Greenko agreed to sell GIC the majority stake in a Mauritius unit that builds wind and hydropower plants in India for £162.8 million (S$347.4 million), according to an Oct 19 statement. London-listed Greenko said in August it had signed non-binding terms with GIC, which already part-owned the asset, sparking a rally in dollar bonds that were issued by special purpose vehicle Greenko Dutch BV.

The arrangement would allow GIC to take ownership of the Indian assets without diluting the listed company's shareholders, according to Niall Walsh, an outside spokesman at London-based Tavistock. The sale proceeds will be distributed to shareholders and the company would be wound up thereafter, he said.

Since the Aug 14 announcement, Greenko's US$550 million of notes due August 2019 have surged 11.9 cents to trade at 105.91 cents on the dollar on Friday, driving the yield to a record-low 6.21 per cent, according to Bloomberg-compiled prices. The five- year bonds traded at 506 basis points more than similar-maturity Treasuries and BI Asset's Bertelsen said there's still room for spreads to go below 500.

The notes had plunged in November after India's central bank said it disapproved of Greenko using an offshore unit to buy debt. They fell below 82 cents in the dollar in January before recovering throughout this year.

Standard & Poor's, which ranks the debt at B, or five levels below investment grade, put Greenko on rating watch with positive implications on Sept 2, saying the GIC deal could lower borrowing costs and see stronger financial and risk management.

"The refinancing rate would depend on many factors, including the new structure," said Abhishek Dangra, a Singapore- based analyst at S&P. "Based on GIC's majority ownership, some market participants and investors have indicated that the company may be able to reduce its cost of debt by about 200 basis points for the same tenor."

Greenko isn't the first Asian company to benefit from Singapore's intervention. Holders of Olam International Ltd's unrated notes also profited after state investment arm Temasek Holdings Pte made a takeover offer for the commodity trader once attacked by Muddy Waters LLC.

Greenko's bond rally bypassed credit analysts at Goldman Sachs Group Inc., who put the notes on a so-called least favoured list on May 19 when they traded at 96 cents on the dollar. The US investment bank cited large capital spending requirements and the risk associated with its leverage. The bonds were still unfavoured as of Oct 1.

Mr Modi's goal to expand clean energy in one of the world's biggest polluters is attracting global investors including Chinese tycoons Liang Wengen and Nan Cunhui, who plan to pour US$5 billion into India's renewable sector. Other billionaires such as SoftBank Group Corp's Masayoshi Son and Foxconn Technology Group's Terry Gou have also outlined plans for substantial investment.

Greenko said it was on track to owning and operating 1,000 megawatts of generating capacity by the end of this year, in a Sept 30 statement. The GIC purchase is still subject to approval by shareholders, who have been invited to a Nov 9 meeting in the Isle of Man.

"A small high-yield company may have a sovereign entity as its shareholder," said Clement Chong, a Singapore-based credit analyst at NN Investment Partners. "The bond market is viewing this very positively."

BLOOMBERG