Bahrain rating cut may hit HDFC Bank's $1.2bn bonds

MUMBAI: Bahrain's downgrade by Standard & Poor's has put HDFC Bank's $1.2-billion foreign currency bonds - issued from its branch in the Middle Eastern kingdom - at the risk of a downgrade too. The bank has said that it is working on a structure so that the bonds' ratings do not slip in line with the sovereign, which has fallen two notches to speculative grade BB from BBB.
S&P on Wednesday downgraded several countries that were dependent on crude oil exports following the commodities slump. They include Kazakhstan, Oman, and Saudi Arabia, besides Bahrain. In foreign operations, Indian banks are allowed to raise debt in international currency by floating bonds or medium-term notes. These funds are typically used to fund foreign operations of Indian multinationals. Most banks issue the bonds from their branches in global financial centres. HDFC Bank had received permission to set up a branch in Bahrain in 2008.
"The rating criteria published by S&P restrict the rating of any bond issued in a jurisdiction to the host country rating. Consequent to the recent rating action on Bahrain, the bonds issued by HDFC Bank may also be subject to rating action by S&P. The bank is in the process of carrying out modifications to the structure of all the issuances done from Bahrain in order to ensure that the bonds issued by HDFC Bank are insulated from any rating actions on the host country," the bank said in a statement to the stock exchange.
Under normal circumstances, no issuer gets a rating higher than the sovereign in the jurisdiction in which the bonds are issued. This means that any downgrade of the sovereign will result in a downgrade of all issuances from the country. However, issuers can create structures where they promise to pay bondholders from assets outside the sovereign jurisdiction, which enables them to pierce the sovereign rating. In the past, business houses like Tata and Reliance have managed to get a rating higher than India's sovereign rating for their companies.