Dynamic India Inc puts bond market on fast lane

The corporate bond market is seeing plenty of activity with banks and companies tapping the overseas markets. In the past few months, at least five banks and a couple of big corporates have mopped up more than $2 billion between them. According to Hitendra Dave, head (global markets) at HSBC, interest rates abroad are attractive and appetite for Indian paper is high.

Last week, AAA-rated Tata Sons has raised close to Rs 1,000 crore in two tranches for two and three year tenures at 7.45% and 7.95%, respectively. Among other more recent borrowers are Bank of Baroda, Bank of India, Axis Bank, ICICI and SBI. ?Banks are refinancing themselves or positioning themselves to support their Indian clients with overseas businesses,? explains Dave.

It?s not just the overseas markets that borrowers are eyeing, there?s ample liquidity at home, too. Oil marketer BPCL has helped itself to 18-month money at just 6.23%. ?The short end of the market is supported by both MFs and insurance companies,? points out Dave. However, it makes sense for companies to shop for long-term money abroad because it could work out cheaper. A company that?s rated AAA would have to pay about 8.2-8.3% for five-year money. It?s possible the same money could be taken by paying 200-300 basis points less in the overseas market. Also, as bankers point out corporates with a natural forex hedge stand to gain even more.

Also, local bankers are somewhat reluctant to sign off on long-term loans given that interest rates are set to go up. Manmohan Singh, managing director, head-primary debt markets, India at Royal Bank of Scotland (RBS), observes that moving forward, Indian banks will look at raising internationally as they lend onshore to Indian companies. ?There could be more issuances by banks and companies in the international market to raise funds because they can access long-term money and also because it?s a chance to diversify the investor base,? he observes.

With the economic environment in the Asian region clearly looking up, India is getting its fair share of money, there?s good appetite for Indian paper. Says Singh, ?We have seen issuances close to $20 billion in Asia in the quarter ended March 2010 as against $11-11.5 billion same time last year.”

Meanwhile, in the domestic market, the spreads between the AAA 10-year corporate bond paper and the 10-year benchmark government bond paper has shrunk to 60 bps from 100 bps, over the last couple of month. That?s because yields on gilts have been somewhat volatile with the supply of government paper increasing. Currently, AAA corporate paper is trading at 8.7-8.75% while a 10-year gilt would be available at a yield of 8.09%.