Mumbai: Rising bank lending rates have forced companies to look for cheap sources of funds outside the banking system, infusing life into the corporate bond market.
On Thursday, state-owned Rural Electrification Corp. Ltd (REC) raised between Rs 3,500 crore and Rs 4,200 crore by selling bonds that will mature in three tranches of three years, five years and 10 years at 9.43%, 9.45% and 9.48%, respectively.
REC’s rate on the 10-year paper is about 100 basis points (bps) higher than that on the government security of the same tenor. One basis point is one-hundredth of a percentage point .
The rates are attractive considering that last month Reliance Ports and Terminals raised Rs 2,500 crore at 10.40% by selling 10-year bonds, bankers said.
They also pointed out that the rate REC is paying is much better than even the minimum loan rate most banks are currently offering to their top-rated corporate borrowers.
The minimum lending rate, or base rate, at two of the largest banks in the country—State Bank of India and ICICI Bank Ltd—is 9.50%.
The recent rise in rates has made the choice easier for companies, said Ashish Ghiya, managing director at Derivium Capital and Securities Pvt. Ltd, a corporate bond broker.
“Even the best Indian companies will not get loans below 9.75% to 10.50% currently, so issuing corporate bonds now is a no-brainer,” he said.
“There has been an increase in activity since, say, April and I expect this momentum to continue for some time because bank credit is not happening and even they are investing in these papers.”
Bank credit growth has slowed to 19.3% so far this year versus 21.3% growth last year as higher interest rates have dissuaded borrowers from seeking loans.
The Reserve Bank of India (RBI) wants it to decelerate further to 18% in 2011-12.
Though REC’s rate is “good”, it will not be right to compare it with the bank base rate, said P. Mukherjee, treasurer at Axis Bank Ltd, one of the bankers to the bond sale.
“It’s long-term money, which is looking very good now but it’s a fixed rate. Going forward, bank base rates will come off and hence, it’s strictly not comparable,” he said, adding that companies usually swap the bond for an interest-rate future to turn it into a floating rate.
Bond traders though are more enthused by the fact that there is investor interest in the market despite big institutional investors such as Life Insurance Corp. of India or Employees Provident Fund Organization not buying the paper.
LIC stayed away because last month it had invested about Rs 1,500 crore each in bonds issued by Indian Railway Finance Corp. Ltd and Power Finance Corp. Ltd (PFC).
The PFC deal at 9.33% was executed just before the RBI increased its benchmark lending rate by a more-than-expected 50 bps.
Traders were expecting a 25 bps increase; bond yields went up by 12-13 bps to factor in the change.
The RBI move has nudged companies closer toward the corporate bond market, bankers said.
“Firms had waited in the sidelines for several months, waiting for the inflation to come down and rates to stabilize. But in July RBI increased its policy rate by 50 bps and sounded very hawkish. Firms can wait no longer for cheaper funds at a time when bank loans are much dearer than bond market rates,” said an investment banker, who was involved in the REC deal.
Bankers and traders expect more such issuances from private and state-owned companies, which could push up corporate bond yields.
Steel Authority of India Ltd, Power Grid Corp. of India Ltd and National Hydro Power Corp. Ltd are among state-owned companies that have lined up plans to raise funds from the market.
Private sector non-banking financial companies such as Tata Capital Ltd and Muthoot Finance Ltd have recently sold non-convertible debentures to the public but have shied away from long-term corporate bonds.
Traders are hoping that high rates will force them to explore the corporate bond option as well.
Derivium’s Ghiya expects companies to raise more short-term money by selling commercial paper ranging from three months to a year on expectation that rates have peaked. “There is a feeling that rates have peaked, so companies will look for short-term money,” he said.
Alpana Dave, vice president at Edelweiss Securities Ltd, said many issuers are still waiting on the sidelines to get a clear idea of the interest-rate scenario.