IDFC has been one of the largest issuers of corporate bonds, with the 2012-13 issuance alone standing at R11,329.20 crore. SJ Balesh, senior director, resources, IDFC, spoke to Shashidhar KJ about trends in the corporate debt market. Excerpts:

How has the debenture redemption reserve clause in the Companies Act affected the bond market?

The issues regarding the debenture redemption reserve (DRR) have been sorted out. The DRR for private placements by financial institutions and NBFCs has been withdrawn via a notification. It now stands at 25% if NBFCs and public financial institutions undertake a public issue. Also, a DRR of 25% will apply for private placement and public issues of corporates and manufacturing companies. The provisions under the Companies Act are beneficial for the corporate bond market as they are good for the governance structure. Once corporates comply with the new rules, I think, it should be business as usual for everybody and you will continue to see issuances, especially NBFCs and finance institutions. As the market matures, you will see issuances by manufacturing and infra companies as well.

April-May was a period of lull for corporate bond issuances. Going forward, how do you see the market?

IDFC is one of the largest issuers of debt in the domestic corporate bond market. Depending on how we grow our balance sheet and how the credit offtake is from infrastructure companies, the issuance will be very similar to what we did last year. For manufacturing companies and other entities, the issuance programme will greatly depend on their investment cycle. Once the investment cycle turns, these manufacturing companies will increasingly come to the corporate bond market. For NBFCs and other finance companies, it will be business as usual.

Given that credit offtake is hovering at around 14-15%, does it make sense to issue bonds at the current rates?

The Indian corporate debt market is much cheaper than the bank loan market for a matured credit. So, if you have a corporate rated AA or above, the corporate debt market gives much more competitive funding compared to banks, because banks have to lend at a minimum of the base rate, which is about 10.25% today. With a new, stable government in, I would expect a higher proportion of that funding requirement to be taken care of by the corporate debt market.

Given the low credit offtake, how do you see yields moving in the next few months?

I will restrict myself to AAA rated companies. Today, you have 10-year government securities trading around 8.8% and if you annualise it, it’s about 9%. At about 9.5% , the yields are 50 bps over the risk-free yield or the G-Sec yield. If you look at the historical trend, it would be one of the lowest spreads, we have seen AAA spreads averaging around 100-75 bps consistently. That’s purely because there is no supply; in the last one-and-a-half months, you haven?t seen too many corporate bonds hitting the market. Once the new supply starts, it will correct itself, hopefully. Assuming the G-Sec yields are where they are, spreads can go higher on a very broad level to 75 bps. But if the G-Secs yield falls, this will be corrected as well.

Is IDFC looking at a rupee-denominated overseas issue?

IDFC has a medium-term note programme listed on the Singapore stock exchange. We are also rated BBB-, in line with the sovereign rating from S&P and Fitch. We had looked at the opportunity of issuing a rupee-denominated bond in the offshore market and applied to RBI, but haven’t got an approval. Rupee issuances also depend on what kind of yield we are getting and how it is comparable with domestic yields. So, it?s subject to regulatory approval and competitive pricing .