Mumbai: Banks’ reluctance to lend and rising cost of overseas borrowing are forcing Indian companies to tap the corporate bond market aggressively.
Since November, there have been 78 issues of corporate bonds, raising at least Rs34,500 crore, according to Bloomberg data. Some of the firms have raised bonds more than once in the past two months.
“We expect that stability will return in the system in the next three months and the corporate bond market will pick up,” said Arvind Sampath, director of rates trading at Standard Chartered Bank. “The market will support companies’ funding needs in the next year or two because we don’t expect ECB (external commercial borrowings) situation to improve in at least a year.”
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Agrees Ashish Ghiya, managing director of bond trader Derivium Capital and Securities Pvt. Ltd, “It is difficult to get credit from the banks now. Companies have to come to the bond market to raise funds.”
Between October and now, India’s banking regulator has cut banks’ cash reserve ratio, or the portion of deposits that banks need to keep with it, by 400 basis points to 5%, releasing Rs1.6 trillion to ease the unprecedented liquidity crisis that hit the financial system in the wake of the collapse of Wall Street investment bank Lehman Brothers Holdings Inc. One basis point is one-hundredth of a percentage point.
The Reserve Bank of India (RBI) has also cut its key policy rates—repo rate, or the rate at which it injects liquidity in the banking system, and reverse repo rate, or the rate at which it sucks out liquidity—in phases to bring down the cost of funds for firms and individuals. Between October and now, the repo rate has come down from 9% to 5.5% and the reverse repo rate from 6% to 4%.
In spite of these, there is a slowdown in loan disbursals. In the three months to December, banks have lent Rs1.03 trillion against Rs1.64 trillion in the same quarter in the previous year. With the surge in liquidity, banks have started parking money in government bonds that offer risk-free returns.
The other route for raising funds—ECBs—is not being used by firms because of the higher cost of such borrowings. The government has raised the cap on the interest rates for ECBs, but even then companies are finding it difficult to raise money as the credit crisis continues overseas.
The credit default swap (CDS) spread, a measure of risk perception, for Indian companies in the overseas market is still high even for established names such as ICICI Bank Ltd, the country’s largest private sector lender, at 607.6 basis points and Reliance Industries Ltd, the biggest company by market value, at 601.9 basis points.
The activities in the bond market, however, still do not match expectations of bond dealers, who complain of a lack of a strong secondary market. The repo-ability of such bonds, or the ability to use them as collateral for borrowing, is also restricted.
Neither the aggressive rate cuts by RBI nor the hike in the limit of investment by foreign institutional investors (FIIs) in bonds has helped boost trading in the secondary market. FIIs can now invest $15 billion (Rs72,900 crore) in the bond market, up from $6 billion earlier.
According to Alpana Dave, head of corporate bond trading at ICAP India Pvt. Ltd, the Indian arm of the UK-based corporate bond trading firm, volume in the secondary corporate bond market was Rs1,896 crore 10 days after the last round of rate cuts on 2 January. This is lower than the volume seen in the 10 days before the rate cuts.
Dealers say corporate bond investors probably believe yields could have hit the bottom for now and rates would only go up from this level. Bond prices and yields move in opposite directions.
However, the same reason could prompt more companies to issue bonds now.
“Companies will want to issue bonds now to get the advantage of a low interest rate scenario. We could see more activities in the primary market this year,” said Harihar Krishnamurthy, head of treasury at Development Credit Bank Ltd.
“Interest rate cycle is downward, giving traders opportunity for trading, which was not possible before six months because every time they entered the market, yields were moving upward, leaving no scope for profit,” said Dave of ICAP.
The yields on bonds issued by manufacturing companies before the rate cuts were 11.5-12%. This has dropped to the 10-10.5% level now.
Despite deep cuts in policy rates by RBI, there hasn’t been a sharp drop in corporate bond yields as investors are not fully convinced about the firms’ ability to service such debt. “There is a lack of confidence now. Investors are still reluctant to invest in papers floated by private firms,” said Joydeep Sen, vice-president (advisory desk) at BNP Paribas Wealth Management.
The spread, or the difference in yields between a corporate bond and a similar maturity government paper, is still high at 200-275 basis points for public sector companies.
For manufacturing companies, the spread is at a high 300-400 basis points. For example, on 5 January, Reliance Gas Transportation Infrastructure Ltd raised Rs1,000 crore in 10-year bonds at 10.95%.
On the same date, the yield on the 10-year government paper was at about 5.2%, a spread of about 5.75%.
Dave of ICAP said the high spread should compress further, giving opportunity for both investments and trading. According to Sen of BNP Paribas, by March, the secondary corporate bond market will see active trading.
According to secondary market dealers, mutual funds have started deploying money in the debt market and companies handling pension funds and insurance companies have started investing in corporate bonds and surrogate bonds such as oil and fertilizer bonds.
RBI’s measures have drastically brought down the rates on certificates of deposits (CDs), or the short-term papers issued by banks. Ninety-day CDs issued in October-November by state-run banks used to be at 8.5%. This has come down to 6.5% now.
According to data available with ICAP, issuances in the CD market in the second week of January were almost Rs10,000 crore. Dealers say mutual funds and Life Insurance Corp. of India are aggressively buying these papers, but Mint could not independently ascertain how many they bought.
Non-banking finance companies (NBFCs), however, continue to pay high interest to raise short-term money through commercial papers.
Before the recent rate cuts, NBFCs used to issue papers for 12.5-13%; the rates have come down to 11-11.5%, according to dealers.
Graphics by Ahmed Raza Khan/Mint