Wai Yee Tsang speaks with Gareth Deiner and Rahul Guptan from Clifford Chance’s Singapore office about the Re13.3 billion masala bond issue by Indiabulls Housing Finance


How did you win this mandate? Is this an existing client or was it a new win?

Guptan: The Indiabulls group is one of my oldest clients. We have been working for them for over 10 years and I’ve worked on every one of their capital markets deals.

Tell me a bit more about your firm’s role on this deal?

Deiner: We were the sole international legal counsel to the joint lead managers, advising on English law, which is the governing law of the documentation, as well as on US federal securities laws as they applied to the offering. AZB was the Indian legal counsel for the banks and BMR Legal was the legal counsel for the issuer.

In addition to conducting diligence, drafting disclosure and the underlying transaction documents, we also advised as to the appropriate structure for the deal, given the unique security structure and the synthetic settlement mechanism between US dollars and Indian rupees.

I understand that this is the first asset-backed issue by an Indian housing finance company. What challenges did this create?

Deiner: While this was not the first secured 'masala' bond issued under the new regulations, it was the first by an Indian non-banking financial company. As such, the security structure and commercial considerations behind giving investors the benefit of security were different in light of Indiabulls Housing Finance being an NBFC and a housing finance company.

Being a housing finance company, Indiabulls Housing Finance doesn't have the benefit of a deposit funding base, and the essence of their business is borrowing to lend. As such, the ultimate value from a creditors' perspective in the business is the size and quality of their loan book, which is secured to their other lenders.

Accordingly, we needed to ensure that although the masala bondholders would be senior ranking creditors, the nature of the issuer's business meant that, absent the benefit of pari passu security on their loan book, investors would effectively be structurally subordinated to all other lenders.

The challenge was therefore to devise a security structure which ensured that bondholders would share equally in existing and future security and therefore to be on a level playing field with other existing and future lenders, rather than consider this from a traditional credit enhancement perspective.

This included designing covenants that were aimed at protecting and preserving the underlying security and ensuring that investors in the masala bonds would enjoy parity with other creditors in the capital structure, rather than being inadvertently subordinated or otherwise preferred.

This was obviously also critical from a marketing perspective, given the spread that masala bond investors are demanding for bearing the currency risk inherent in the instrument. Effective subordination could otherwise have had adverse consequences for the pricing dynamics of the deal.

Guptan: Just to add to that, from the issuer’s perspective that was key for them. Their business is entirely a rupee business—to lend money to people buying homes in rupees, they needed an instrument to access dollar funds without the exposure of the exchange rate. From the investors’ perspective, who want to lend in dollars, they want a robust security structure. We were able to structure that for them, and to make sure that the documentation works for the company and for the investors and the banks.

You are referring to the first pari passu charge clause, am I correct?

Deiner: Yes, and the collateral provisions. In addition, the minimum security coverage ratio of 1:1 as aimed to ensure that the issuer retain the flexibility to grow its loan book and grant security over that in future, while preserving the bondholders' position and recourse to the asset pool. This is obviously a critical protection mechanism to ensure the value of the collateral compared to the value of the debt outstanding would never fall below a dollar to dollar value.

The other interesting feature was the permitted collateral feature, which gives the issuer flexibility to continue to grow their loan book provided that the minimum security coverage ratio and other financial covenants are maintained.

On the whole, these bond conditions aimed to balance the interest of the investors in having effective pari passu recourse to the issuer's asset book, with the commercial needs of the issuer to maintain operational flexibility in growing its loan book.

What other challenges did you face undertaking this deal?

Deiner: Indiabulls Housing Finance has tapped the international capital markets quite frequently and they had the benefit of a sophisticated syndicate of banks, particularly in the short execution timeframe for the deal. Clearly there were challenges in structuring the bonds given that the unique commercial dynamics and interplay between the security and the nature of the issuer's business, and therefore we did not have the benefit of precedent. This transaction was ultimately a success and well executed by all counterparties and advisers in a short time-frame. 

Do you think there is a need for the Reserve Bank of India or the Indian government to undertake measures to increase the attractiveness of 'masala bonds'?

Guptan: The regulations came out more than 24 months ago. When it first came out, there was not enough clarity to allow the product to take off. The Indian regulator responded to market feedback and tweaked the regulations which allowed the deal flow to commence.

Currently, the domestic debt market—in terms of Indian companies issuing rupee bonds on local stock exchanges has picked up considerably. Indian issuers have a wealth of choice when they are looking to access debt; they can do so very cheaply and quickly in India in the domestic debt markets, or if they want the structure to go abroad they can choose to issue foreign currency denominated bonds or 'masala bonds'.

I think it is not a question of the regulator, but simply that the issuers are adapting to the liquidity in the market where it is available. I cannot think of anything that needs to be changed in relation to the regulatory framework.

Deiner: When the regulations came out initially, one of the big concerns was that the minimum maturity requirement was five years. That led to the market never really taking off because the INR-US dollar cross-currency swap market was seen as not being sufficiently liquid.

However, the regulator reacted with admirable speed in decreasing the minimum maturity period from five to three years, which opened an avenue for investors to be able to hedge currency exposure over that shorter horizon.

I wouldn't think that there is a regulatory issue as to why we do not see more issuance volumes at this stage, but rather, it's likely more of a market dynamic points in the sense that issuers are getting the pricing they need in the domestic market; there is effectively sufficient liquidity and at the right price.

It is an economic issue rather than there being anything problematic with the regulations. The regime has clearly proven to work quite well.

Now that the new liquidation processes under the Insolvency and Bankruptcy Code 2016 are in effect, will this impact the way you compose the relevant contractual terms for future Masala bond issuances?

Deiner: Not necessarily. 'Masala' bond documentation, and the rights and obligations of issuers and holders, are invariably going to be governed by English law (and potentially New York law, should demand for the masala bond product develop in the US in future). As such, it would also therefore be an English court that would have jurisdiction to determine any dispute and have the power to enforce the issuer's obligations.

It would only therefore become an Indian law issue when judgement is obtained and enforced onshore in India, particularly in a distressed or insolvency scenario. As such, I cannot see how this would impact the structure or documentation of bond issues by any Indian issuers and as a general matter, I don’t think you are going to see changes in the governing law provisions of any bond documents by Indian issuers, both in the 'masala' and traditional G3 bond markets.

Guptan: I agree with that. The new law will have an effect on foreign bondholders and trustees to recover funds in an insolvency scenario. But I don’t see that it will change the contractual documentation at all. I believe it will be positive for the bond market if anything else. 


Indiabulls Housing Finance Re13.3 billion 'masala bond' issue

This deal record is from the IFLR1000 Deal Data product.