BackBond market warms up to NBFCs but Franklin Templeton's troubles echo
Debt mutual funds are going easy on corporate bond purchases and are instead buying more government bonds. Banks are filling the shoes of mutual funds but this may not sustain for long.
PremiumThe corporate bond market has been abuzz with issuances in the last two months. Thanks to measures by the Reserve Bank of India (RBI) and the government, companies have raised around ₹1.4 trillion from the market in the first two months of FY21. Bond traders said that the month of June too looks promising in terms of issuance volume.
Indeed, yields have fallen not just for AAA rated issuers but also those below. Many firms that were absent from the market for the last 6-9 months have come back to raise money.
From regulars such as Indiabulls Housing Finance Ltd to rare ones such as Crompton Greaves Consumer Electricals, issuers have found investors. The policy rate cuts by the RBI and the targeted long-term repos have meant that borrowing costs have reduced.
So have the good days returned for the corporate bond market?
While the issuance volume may suggest so, a broad easing of borrowing conditions is still absent. An issuer with government ownership is best placed to raise cheap money. Power Finance Corporation and Rural Electrification Corporation have seen their cost of borrowings plummet given their quasi-sovereign status. The AAA-rated non-bank lenders too have gotten the benefit of falling yields. But it is still tough for those rated lower. Moreover, investors have become more discerning in their purchases. Credit ratings have become just a single input while other parameters have gained importance in decisions. “Rating is for compliance and there is some guidance too. Now investors are looking more closely at balance sheets than they were before," said a bond trader requesting anonymity.
This wariness stems from the closure of six debt funds by Franklin Templeton Mutual Fund earlier this year. For instance, Shriram Transport Finance Corporation’s bonds are trading at levels that even risky high-yield bonds would not. Owing to the liquidity issues faced by Franklin’s funds, the pressure on STFC bonds is huge because of its rating being lower than AAA. What’s more, debt mutual funds are going easy on corporate bond purchases and are instead buying more government bonds. Banks are filling the shoes of mutual funds but this may not sustain for long.
In FY20, banks had ended up pruning their outstanding holdings in private sector corporate bonds. Data from the RBI shows that holdings fell by around ₹42,000 crore. This year could be different. Even so, fund houses cater to more than half the bond supply in any given year and are still major investors in the corporate bond market. Banks, already weighed down by a large bad loan pile, won’t go all out in picking up bonds lest their investment book begins to take a hit as well.
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