Mumbai: Mint Street wants the bond market to be the preferred fund-raising choice for local companies seeking debt financing, but Corporate Indias collective journey toward financial maturity and de-risking seems to have hit interest-rate speed bumps.
In April, bond sales halved from the year-ago period: Firms raised ₹13,400 crore in 55 issuances until April 24, show data from Edelweiss that sources information from Prime Database, a Delhi-based analytics company. In April last year, companies had raised ₹26,700 crore.
Most corporates sell shorter-duration bonds, with one-to-five-year maturities. Rates in the short end of the yield curve have risen after New Delhi said it would borrow more of short-term debt as part of a broader programme to reduce federal indebtedness. The yield curve has become flatter in India over the past few months, with longer-maturity debt costing relatively less.
“Yields have gone up significantly in shorter maturity government bonds. The sharp rise in government bond yields has crowded out corporate borrowing at competitive rates,” said Suyash Choudhary, head of fixed income at IDFC Mutual Fund. “Investors will not buy corporate bonds unless they offer reasonably higher rates than similar maturity GSecs.”
The gap or spread between a fouryear sovereign paper and the repo rate has widened to 175 basis points. It was just about 115 basis points even about three weeks ago. Even that gap was much higher than recent historical averages.
In past two weeks, top-rated Small Industries Development Bank of India (SIDBI) has tried three times to tap the bond market but aborted the bond programme after investors sought higher rates. Similarly, National Bank for Agriculture and Rural Development (Nabard), too, failed twice to find buyers for its debt paper at rates acceptable to the development financier.
“Some companies did try to raise money this month but could not do so due to higher rates,” said Ajay Manglunia, EVP & Head fixed income markets at Edelweiss Financial Services. “Also, new companies are hesitating to tap the bond market as a new rule came this financial year mandating issuers to sell bonds directly to investors on the exchange platform.”
Beginning this financial year, the authorities have diluted the role of bond arrangers as issuers now have to raise money through the electronic bidding process on exchanges. The move is aimed at bringing more transparency to debt financing.
Interestingly, the gap between a four-year bond and 30-year bond has narrowed to just about 25 basis points from about 50 to 60 basis points as recently as in the last quarter. Such a flat curve is unjustifiable from a macro standpoint and is drastically pushing up borrowing costs for corporates despite the repo rate not having been raised yet.
To be sure, the central banks latest measures allowing overseas investors to buy shorter maturity papers should reverse the trend.