Sales reviving as rate hikes near end

Written by Bloomberg | Updated: Oct 29 2011, 09:10am hrs
Indian companies are reviving bond sales that fell to a three-and-a-half-year low this month after policy makers signaled they are nearing the end of a record run of interest-rate increases.

Axis Bank, the biggest arranger in 2011, and ICICI Securities Primary Dealership, the third-largest underwriter, say issuance may rebound and approach last years R1.9 lakh crore, from the current R1.3 lakh crore. Corporate bond sales totaled R3,300 crore in October, the least since R2,600 crore were raised in April 2008. The chance of a rate increase in December is 'relatively low', the Reserve Bank of India said on October 25 after raising borrowing costs a record 13th time since the start of 2010. The yield premium on five-year rupee-denominated securities issued by the nations top-rated corporate borrowers over government debt has shrunk to a 10-month low of 88 basis points. Similar spreads were 171 in China and 121 in the US.

Its favourable for companies to sell bonds now as the possibility of a sharp rise in yields appears low, said Parthasarathi Mukherjee, the Mumbai-based president of treasury and international banking at Axis Bank. RBIs signal of a likely pause will encourage more companies to sell bonds.

Rural Electrification Corp, a state-controlled lender to power projects, plans to raise at least R250 crore in 10-year

debt. The New Delhi-based company has invited banks to arrange the sale for October 31. Axis Bank has managed 178 issues so far this year valued at R19,754 crore, and has a 15% share of the market. ICICI Bank underwrote almost 15% and ICICI Securities Primary Dealership 9.4%.The extra yield investors demanded to hold five-year rupee bonds rated AAA by Standard & Poors local unit, Crisil, over similar-maturity government bonds has narrowed 31 basis points this month.Yields are easing from higher levels in mid-2011, which improves conditions for issuers to sell bonds, Shameek Ray, the Mumbai-based head of debt capital markets at ICICI Securities Primary Dealership, said. Debt sales this year may match last years volumes, he said.

Yields on the governments 7.8% securities due in April 2021 rose seven basis points from October 25 to 8.83% on Friday. The yield has climbed 91 basis points this year after the finance ministry said at the end of last month that it will borrow 13% more than planned in the year ending March. The average cost of protecting the debt of eight Indian borrowers against non-payment using credit-default swaps has slid 88 basis points this month to 353 basis points, according to CMA, which compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a nation or company fail to adhere to its debt agreements. Inflation 'seems to be trending down', RBI governor Duvvuri Subbarao on October 26. The wholesale price index rose 9.72% in September from a year earlier after climbing 9.78% in August, according to commerce ministry data released this month.

Asked whether interest rates will be cut in the next fiscal year beginning in April, Subbarao said that it will be difficult to look that far ahead, but you know that we all have an optimistic view of the world and an optimistic view of India, and I hope that it remains in the optimistic way and that the rate cycle can be brought down sooner rather than later.

Rupee-denominated notes lost 1.1% this month, the worst performance among 10 Asian debt markets monitored by HSBC Holdings. The difference in yields between Indias bonds due in a decade and similar-maturity US treasuries was 641 basis points, compared with a record-high 676 basis points reached on October 3. Potential issuers may choose to raise foreign-currency debt as global funding costs are cheaper than in India, according to SJS Markets. Indian companies led by ICICI Bank have raised $9.1 billion from selling bonds denominated in foreign currencies this year, surpassing $6.5 billion in the same period of 2010.

The rupee has weakened 8.6% this year, the worst performance among Asias 10 most-traded currencies. The rupees slide has been caused by the safe-haven effect and the uncertainty in Europe and around the world, Subbarao said. The external situation, uncertain as it is, is less uncertain today than it was a month ago. In Europe as well as America, I think politics are catching up with economic reality so there is less uncertainty than a month ago.

The central banks decision to be explicit about a stop to rate hikes has enhanced its credibility, and dispelled uncertainty about rates and anchored future expectations, Goldman Sachs Group said in a research note. Inflation and growth are likely to surprise on the downside and the RBI will likely cut interest rates by 100 basis points in the fiscal year beginning April, Goldman economists Tushar Poddar and Prakriti Shukla wrote in the report.