Mumbai: With investors in the international bond market shying away from even investment-grade corporate debt, Indian firms are being forced to turn to the local corporate bond market to raise funds.
Bankers and dealers say that the subprime crisis, or the high defaults on debt offered to risky borrowers in the US, may well turn out to be a boon in disguise for the local corporate bond market, which has been flagging so far because of the high cost of borrowing.
The companies themselves do not agree and say that bank credit at the prime lending rate would be their preferred source of funds. However, both numerical and anecdotal evidence points to the revival of the domestic corporate bond market.
In July, the volume of trades on the secondary market for corporate bonds shot up to Rs13,626 crore from a mere Rs4,795 crore in June.
“There is an increased appetite among Indian corporations to access the domestic debt market,” said S. Venkatraman, director, corporate and government ratings, at Crisil Ltd—a subsidiary of global ratings agency Standard & Poor’s. “Earlier, these companies would not look at the Indian debt market, because raising funds overseas was cheaper. The revival of the domestic bond market looks inevitable,” he added.
In the past fortnight, Indian Hotels Ltd has raised Rs300 crore at an interest rate of 9.86%. The company, which runs the Taj chain of luxury hotels, has entered the local debt market after a gap of six years. Another frequent borrower in the international bond market, Gas Authority of India Ltd (GAIL), has announced its plans to raise Rs18,000 crore from the corporate bond market. The issue has not been priced. The state-owned gas firm is entering the domestic debt market after a gap of two to three years.
Indian Railway Finance Corp. Ltd, Power Finance Corp. Ltd, and Rural Electrification Corp. Ltd—all financing arms of various government departments—are now also planning issuances in the domestic corporate bond market.
Global credit rating agency Moody’s Investor Services, in a report released on 5 September, said that because of their low or nil exposure to subprime loans, Asian companies may not face troubles but that the “cross-border market for now remains essentially shut.”
It added that Asian companies may now have to rely on their local debt markets to raise funds.
The cost of debt has gone up substantially in the international bond market. In April and May, an Indian company issuing an AAA-rated paper (or very high quality debt) with a maturity period of five years commanded a spread of 0.5% to 0.6% over the London Interbank Offered Rates, or Libor—the most commonly used benchmark for short-term interest rates.
That spread has now widened to 0.75 to 1%, indicating that investors perceive the debt as riskier now than they did a few months ago.
“This has nothing to do with the quality of the paper but the general aversion of investors to risk in the international bond market,” said Anil Ladha, senior vice-president, ICICI Securities Primary Dealership Ltd.
Part of the boom in the domestic corporate bonds market also has to do with the dwindling popularity of foreign currency convertible bonds (FCCBs). An FCCB is a quasi-debt instrument in a currency different from the issuer’s domestic currency. The instrument is similar to bonds as it ensures regular interest payments; it also gives the holder the option to convert the bond into stock.
In an effort to reduce capital inflows (and regulate liquidity), the government has placed fresh restrictions on the raising of foreign funds through external commercial borrowings (ECBs). Companies can now raise only up to $20 million (Rs81.4 crore) for rupee expenditure, and that, too, with the prior approval of the central bank.
Investment bankers have been advising their clients to keep away from these instruments for now. A banker with a large American bank, who did not wish to be identified, said that he has advised his clients to put their FCCB plans on hold for now.
He added that he does not see the subprime scare going away in a hurry. Issues in the FCCB market have dwindled to a couple in August from seven in May.
Harihar Krishnamurthy, head of treasury at Development Credit Bank Ltd, said that the domestic corporate bonds market wasn’t exactly inexpensive. “Spreads between the government securities market and corporate bond market have widened in the range of 1.5-2% on an average and even 3% in specific cases, over the last two months,” he added.
Spreads between government securities and corporate bonds have increased because there is a scare among market participants that the central bank is trying to suck out excess liquidity from the system.
“Indian companies are not left with much choice as the global subprime scare is not expected to subside in a hurry. Until then, Indian companies will either have to take a bank loan or access the bond market to raise capital,” said Krishnamurthy.
However, companies are not ready to admit just as yet that they are left with little choice but to access bond markets locally.
“The government has its reasons for making it difficult for Indian companies to raise money overseas through the ECB route and the international bond market seems difficult to access as of now,’’ said Venugopal N. Dhoot, chairman and managing director, Videocon Industries Ltd. He added that companies with a “good rating” could “get a bank loan” at the prime lending rate and that he considered this a better alternative to accessing the local bond market. There are “issues of liquidity and trading” that still remain unresolved in this market, Dhoot added. “It would be last on our priority list if we have to raise money,” he said.
Seshagiri Rao, director, finance, at Jindal Vijayanagar Steel Ltd, said that the local bond market lacked depth and that it wasn’t cheap. “We are waiting and watching now and will not float an issuance in the local debt market in a hurry,” he added. His first preference: bank credit at the prime landing rate.