Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Market / Stock-market-news/  Companies go slow on raising debt from the markets
BackBack

Companies go slow on raising debt from the markets

Overall debt issuance volume shrunk by 21% to Rs1.66 trillion in January-April 2016 compared with Rs2.12 trillion in the same period last year

Nearly 60% of the Rs1.66 trillion raised through the bond market was by entities with AAA rating and a stable rating outlook and 18% from AA rated firms, India Ratings said in a report. Photo: Pradeep Gaur/MintPremium
Nearly 60% of the Rs1.66 trillion raised through the bond market was by entities with AAA rating and a stable rating outlook and 18% from AA rated firms, India Ratings said in a report. Photo: Pradeep Gaur/Mint

Mumbai: Amid concerns of corporate leverage and pressure on profits, fund raising through the corporate bond market continued to be dominated by top-rated financial companies, with a few from the construction sector also accessing the market in the first four months of 2016.

Overall issuance volume shrunk by 21% to 1.66 trillion in the January-April period of calendar year 2016 compared with 2.12 trillion in the corresponding period last year, Fitch Ratings’ domestic arm India Ratings said in a report on Thursday. The slowdown in issuances was across categories and sectors, the report said.

Nearly 60% of the 1.66 trillion raised through the bond market was by entities with an AAA rating and a stable rating outlook and 18% from AA-rated firms, the report said.

“The appetite for corporate debt will be driven by domestic investors. Given the nature of these investors, bond market development is likely to remain restricted in the AA and above categories. Credit quality issues may keep the outlook challenging for issuers down the credit curve," the rating agency said in the report.

Indeed, companies rated below AA struggle to raise funds through the bond market and the benefit of lower bond yields compared with loan rates is not available to them. Issuances by companies rated below AA totaled a mere 12,000 crore, the report said.

Issuances by unrated entities totaled 28,830 crore, far higher than lower rated companies indicating that investors are looking at factors other than ratings while buying corporate bonds. “While pricing a corporate bond, investors not only look at the rating but also the history of the company, the sector it belongs to, whether it is government-owned or private etc.," said Shashikant Rathi, head of treasury and debt capital markets at Axis Bank.

Power generation and supply companies dominated the unrated issuance stock. Most of these companies are owned by the government and thereby are perceived to be quasi-sovereign and largely risk-free. Distribution companies had issued bonds in the market under the scheme of Ujwal Discom Assurance Yojana (UDAY) of the government which sought to reduce the debt burden of loss-making discoms. Under the UDAY scheme, state governments took over 75% of the debt of the discoms by converting bank loans into bonds backed by the state government. Discoms can also issue bonds to the market to convert the remaining 25% debt.

Risk takers in the corporate bond market, mainly mutual funds and foreign investors, have turned cautious of late. Most foreign investors are keeping off corporate bonds, the report said. Indeed, data from depositories shows that foreign investors have pruned their corporate bond holdings between January and April by around 11,000 crore. Investors have further cut down their holdings by another 5,400 crore since then. India Ratings said that foreign investors would prefer to take a call on interest rate movement rather than credit risk and hence would prefer government bonds to corporate bonds.

Mutual funds have increased their corporate bond holdings by 30% to an outstanding 3.5 trillion. The appetite for lower rate bonds is low from mutual funds also, according to Milind Barve, managing director of HDFC MF. “The credit spreads are really low. I don’t think the risks are being adequately compensated. That is the principle reason why the size of the bond market below AAA has not developed. The spreads are low and it is difficult to demonstrate a higher yield to compensate risk," said Barve at a corporate bond seminar on Tuesday.

India Ratings said that credit spreads on investment grade bonds are likely to remain stable, given a steady appetite and lower supply.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 03 Jun 2016, 09:26 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App