Photo: Mint
Photo: Mint

PSUs favour corporate bonds as long-term interest rates decline

NHPC raises more than Rs1,000 crore via a private placement and MTNL Rs1,500 crore by selling 10-year bonds

Mumbai: State-owned firms are raising money in the corporate bond market as a drop in long-term interest rates helps them to retire costlier debt and fund capital expenditure programmes.

Hydropower generator NHPC Ltd raised more than 1,000 crore through a private placement on Wednesday and Mahanagar Telephone Nigam Ltd (MTNL) raised 1,500 crore by selling 10-year bonds on Monday.

Many more may follow in the next few months, hoping to take advantage of the reduced difference between benchmark government securities and corporate debt. Nuclear Power Corp. of India Ltd and Steel Authority of India Ltd are likely to raise more than 2,000 crore each next week, corporate bond dealers said.

NHPC raised 1,025 crore by selling bonds in two tranches maturing in 10 and 15 years. The 10-year bonds were sold at 8.49%, just 33 basis points higher than the benchmark 10-year government security, which closed at 8.16%. One basis point is one-hundredth of a percentage point.

In March, another government-owned company, Food Corp. of India (FCI), raised 8,000 crore by selling bonds maturing in eight years at 9.95% when the 10-year yield was averaging 8.79%.

In other words, the difference between what FCI paid for eight-year money and the government security then was 116 basis points, much higher than the difference for a higher tenure of money than companies can get now.

The reduced difference between government bonds and corporate securities is an important reason for the recent spurt in activity in the market, said Rudraksh Bhatt, vice president at Darashaw and Co. Pvt. Ltd, a corporate bond broker.

“Besides the companies that have raised money, many others are waiting for the yields to ease further," Bhatt said. “The difference between MTNL’s 10-year bond and 10-year government security, for example, was just 3 basis points."

Investors bid 8.24% half-yearly interest for the MTNL bonds on Monday at a time when the average 10-year bond yield was 8.21%, although the annualized rate at 8.41% was higher.

MTNL’s bond was an exception, as it came with a sovereign guarantee that made it almost a government security, but other firms do not have such a surety, which means such pricing may always not be possible.

Lower interest rates are not the only reason for these companies accessing the debt market, according to Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership Ltd.

“The major reason is these companies need the money and since rates are down, it is a good time to raise cash. I don’t think companies raise money in advance just because rates are low because they need to finally put the money to use," Ray said.

Firms are now warming to the market after a lull, especially in the June quarter, after the new companies law rules said firms raising money via these bonds have to set aside a cash reserve equivalent of at least 50% of the amount they borrow and also get shareholders’ approval, he said.

Firms such as MTNL are more likely to raise money to pay off loans they took at a higher interest rate. Dealers said the company could look at selling at least another 2,000 crore of bonds in the next few days.

There was a spurt in the issue of long-tenure bonds—maturing in seven to 10 year—between April and October compared with the same period last year, according to researcher Prime Database. Companies raised 10,175 crore in these tenures, up from 3,818.91 crore raised in 2013.

Bhatt of Darashaw expects volumes to pick up further in January as foreign institutional investors (FIIs) line up to lock-in long-term money at high yields, armed with renewed investment allocations in the new year.

FIIs have only used 54.59% of their $51 billion allotted investment in corporate debt as yet, as per data from Securities and Exchange Board of India.

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