Corporate bond market is seeing huge opportunities in the completed infrastructure projects space, says Sujata Guhathakurta, head of debt capital markets at Kotak Mahindra Bank. In an interview with Bhavik Nair, she asserts the need for a delivery versus payment (DVP-3) settlement in corporate bonds and the requirement of an online trading platform similar to the NDS-OM in the government securities to make the market more liquid. Excerpts:
Which sectors are showing interest in the corporate bonds?
We are getting a lot of enquiries from completed road and power project operators. While there is very good demand for annuity road projects, the capital market players are keen on taking a call even for toll road projects where the operators are strong. Renewable and thermal energy players have also shown interest. In a lot of projects in this space, the companies are looking to refinance the completed projects which were initially funded by loans with bonds. It helps companies to tap a new source of funding at finer prices and keeps their lines free with banks for greenfield projects. We are seeing credit enhanced structures, too, to improve the rating. Other than this, we have regular corporate issuers who are refinancing higher cost loans with bonds or borrowing by way of bonds for new capex requirement.
Which are the sectors or space that hold opportunities for the bond market?
There is a huge amount of opportunity in the completed infrastructure projects, where we can structure bonds. Another sector where we see opportunity is real estate, both for balance sheet funding and CMBS structures.
Where do you see the yields going forward for corporate bonds?
Right now, the curve is flat. A three-year bond yield is between 8.17% and 8.20%, five-year and 10-year bonds are at close to 8.35% and 8.40%, respectively. The spread over the government securities is not very high as of now. Corporate spreads have compressed (to less than 50bps for AAA PSUs) in the recent past due to FPI buying. There has been a decent demand for bonds of non-financial companies from banks and MFs. Our view remains constructive on rates with rate cut as early as September 29 policy unless the rupee depreciates much. With global deflationary impulses auguring well for domestic inflation, we feel there is a scope for further accommodation. Going forward, we expect demand for corporate bonds to remain robust across credit curve and maturities. New PF investment norms have increased allocation towards bonds resulting into more demand in greater than 3-year segment. With growing acceptance of credit funds, demand for lower rated (AA or lower) papers is expected to remain robust too. Banks are also likely to participate in non-financial papers significantly due to LCR related buying. We expect corporate bond yields to ease from here with a reasonable possibility of spreads compressing in select segments.
Last fiscal, companies raised close to Rs 4.04 lakh crore through the corporate bonds. What do you think the figure will be this year?
This year, we are seeing a lot of corporates coming to refinance loans by way of bonds. I feel this amount will definitely be higher than last year.
If you were to ask for one change to the regulator in context of the corporate bond market, what would you suggest?
I would say that corporate bond market is still illiquid. We still don’t have a DVP-3 (delivery versus payment) settlement in corporate bonds like in the case of government securities. Also, we need an online trading platform like the NDS-OM. After NDS-OM, the liquidity and volumes in the government securities market shot up exponentially.
Financing corporate bonds is relatively costly with no recourse to RBI as in case of gilts. If CBLO like system is introduced — which does away with individual signing of agreements with counterparties — the corporate bond repo would get a boost. The other impediments on increased volumes are non-standardisation of coupon frequency and re-issuance in liquid benchmarks.
What is happening in the infrastructure bond segment? It has been some time since any bank has issued these bonds…
The lending to infrastructure has slowed down. Banks are waiting out for the right time to issue these bonds. Also, the minimum tenure here is seven years. Locking-in current interest rates for seven years in a falling interest rate scenario coupled with the fact that there aren’t enough opportunities to lend is subduing the market for this category of bonds.
We are not seeing additional tier-I bonds or perpetual bond issuances by banks…
There is very limited demand for that category now. The largest investor segment for these bonds are PFs, gratuity and pension funds. As per the new PF guidelines, these funds cannot invest more than 2% of their portfolio in these bonds. Along with the earlier issuances, most PFs are already full up in this category. Also now they can only invest in AA or above rated bonds; so that also restricts demand.