KIIFB’s masala bond fate hanging in balance?

S&P’s BB long term rating may not auger well for bond issue


KOCHI: The fate of KIIFB’s Rs5500 crore ‘masala bond’ programme is hanging in balance as viewed by most financial experts this portal contacted for response following the BB/B rating from Standard & Poor’s (S&B), one of the top three international rating agencies.

While the BB is the long term rating, B denotes the short term rating. Standard Chartered Bank and Axis Bank have been entrusted with the job of advising on the issue.

Though Kerala Infrastructure Investment Fund Board (KIIFB) has tried to paint a rosy picture of the BB long-term issuer credit rating accorded by S&P for the bond programme, there are several financial services industry experts, who strongly believe that the Board will find it difficult to raise funds from international market with a rating of BB that is below investment grade.

However, fund raising by way of bank loans may not be a challenge given the guarantee KIIFB enjoys from the state government.

Talking to in the context of the rating from S&P recently, Dr KM Abraham, the chief executive of KIIFB said the details of the roadshow are yet to be finalized.

“Our rating is the highest for any state government or agency so far. We will have to weigh all options,” he added without giving a definite timeframe for the next moves.

Sanjeev Kaushik, deputy managing director of KIIFB, was reported to have hailed the rating as a shot in the arm for the Board’s bond programme. “We are in the process of issuing masala bonds, a first for any Indian state-owned entity. These are Indian rupee-denominated five year bonds to be listed on London and Singapore stock markets,” Kaushik was reported as saying.

Financial controller of a bank based in Mumbai, on condition of anonymity, said the large overseas institutional investors view ratings from international agencies as sacrosanct and would normally not ignore their ratings when it comes to long-term investments, though on occasions, such ratings have been proved wrong as in the case of IL&FS and many others.

Talking to, I Unnikrishnan, financial expert and managing director of Yogakshemam Loans Ltd, said, “With this rating it will be extremely hard for KIIFB to raise money from international market. I don’t want to state that it’s impossible.”

The fact is that even KIIFB didn’t expect the rating from S&P to be below investment grade. Talking to this portal earlier, Dr KM Abraham, the chief of KIIFB, had expressed hope that the rating for the masala bond programme would be investment grade.

“We can’t anyway hope to get a better rating than the sovereign,” Dr Abraham had quipped during that chat. India’s (sovereign) rating is BBB-, which is the lowest investment grade, and BB is certainly below that and hence non-investment grade or ‘junk‘ grade.

“Even if one hypothetically tries to arrive at a pricing that KIIFB may be required to pay the investors in the event of the Board launching a bond that was denied an investment grade rating, where will the calculations take us to?” Unnikrishnan raised a relevant question.

Unfortunately, it’s a double whammy for KIIFB, as on the one hand, the rating has not been favourable and on the other and more importantly, the rupee is passing through one of its worst phases ever with its exchange rate digging deeper into newer all-time lows with dollar.

The investors would certainly be wary of investing in a masala bond at this juncture also for the reason that the dollar-rupee hedging cost will be relatively high given the unstable rupee situation.

In a masala bond that is denominated in rupee, the issuers don’t carry any exchange risk, whereas the investors are the ones that have to shoulder the exchange risk between dollar and rupee.

Though the financials of KIIFB are really strong, Kerala state’s strength was mirrored in the rating of the Board, which is an investment arm of the state, and moreover all its debts are guaranteed by the state.

KIIFB has a fund base of Rs4089.19 crore as of March 31, 2018 by way of capital (Rs75 lakh), loan funds (Rs100.80 crore) and Rs3987.64 crore (as grants from Government of Kerala). The KIIFB chief strongly believes that a strong fund base to ‘flaunt’ could help the Board gain confidence from contractors participating with the KIIFB projects


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