Corporate debt: shrinking spreads to keep investors away

Corporate debt: shrinking spreads to keep investors away
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First Published: Mon, Apr 26 2010. 12 03 PM IST
Updated: Mon, Apr 26 2010. 12 03 PM IST
Mumbai: Few Indian firms are planning to float bond issues this week, as shrinking spreads keep large investors away from the corporate debt market, while foreign investors are buying short-term paper, bankers said.
The spread between yields on government paper and corporate bonds of the same maturity has shrunk, given a bearish view on yields, thanks to a large borrowing plan and light supply of corporate debt at the start of the financial year.
“Big guys like LIC are not buying. They are active on the Gsec (government securities) side but not corporate debt as they are probably waiting for coupon rates to rise a little and that will happen once supply kicks in,” said an official with a foreign bank.
The government plans to sell a record Rs4.57 trillion of debt this fiscal, while the Reserve Bank of India’s statement that it would prefer a series of small rate hikes to rein in inflation has resulted in a far more upbeat outlook on rates, pushing government yields higher and corporate ones lower.
At its policy review last week, the Reserve Bank of India (RBI) raised key interest rates by 25 basis points, and governor Duvvuri Subbarao said the bank believes that “moving in several baby steps towards normalization is better for the economy to adjust to pre-crisis levels”.
The spread between the Reuters benchmark five-year corporate bond yield and same maturity government bonds has compressed nearly 35 basis points in the current fiscal year, having narrowed to 55.88 basis points on Friday from 75.47 basis points a week earlier.
Light supply
Supply from corporates has been light because several state-run firms like Rural Electrification Corp (REC), which are regular bond issuers and who typically borrow long-term money, have yet to finalize their borrowing plans.
Current issuance has therefore largely been in short-term paper as foreign institutional investors (FIIs) have been lapping up such debt.
The Reuters benchmark five year top-rated corporate debt yield ended at 8.28% on Friday, nearly 20 points down from 8.47% a week earlier.
This has made corporate debt unattractive for domestic borrowers, who would rather invest in risk-free government paper given the tight spread, while foreign investors, who are lured by the interest rate differential, opt to invest in shorter-tenure paper.
“FIIs buy such paper as the shorter tenure keeps risks relatively low,” said a merchant banker.
Bankers said large Indian investors like state-run Life Insurance Corporation of India (LIC), which last fiscal year budgeted about Rs500 billion for corporate debt purchases, might resume buying when state-run firms begin issuing.
Insurance companies buy long-term bonds, issued typically by state-run issuers, mostly infrastructure-related businesses, who require long-term funds and also enjoy government backing in one form or another.
A narrow majority of analysts now expect the RBI to raise interest rates again before its next review in July, a Reuters poll found, with rises totalling 100 basis points in both key policy rates forecast by the end of the fiscal year.
Regulations
In a continuing move to further regulate and deepen the corporate bond market, the RBI last week took two major steps, both of which are seen as directly or indirectly increasing issuances of non-convertible debentures (NCDs).
It said any investment by banks in long-maturity bonds sold by infrastructure companies and within a minimum residual maturity of seven years can be classified under the held-to-maturity category (HTM) category, meaning losses on them do not need to be booked at the end of the financial year.
The RBI also proposed a minimum holding period for loans which will be securitized, a move seen as potentially killing the nascent market, but one which could conversely boost lending via NCDs rather than direct loans.
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First Published: Mon, Apr 26 2010. 12 03 PM IST