A sharp decline in default rates in the infrastructure sector has boosted investor confidence, driving strong demand for recent infrastructure bond issuances by banks. These bond issuances have received an overwhelming response from investors, with bids coming in several times higher than the issue size.
According to data from the National Bank for Financing Infrastructure and Development (NaBFID), the default rate for investment-grade companies, which peaked at 4.5% in FY16, has steadily dropped to below 0.5% over the past three years.
Experts say that higher demand is a clear sign of heightened investor confidence. “There is a comfort in the infrastructure sector. Default rates in investment grade securities are below 0.5% that tells that if resources are raised for infra and deployed in infra projects, the likelihood of money returning with interest is very high. That gives investors a lot of confidence,” Sujit Kumar, chief economist, NaBFID, said. “Investors such as pension funds, asset management companies, insurance companies are now lapping up these issuances,” added Kumar.
Default rates have improved across the board in Infrastructure. The overall default rate was 2.2% In FY 2010, which peaked at 8.5% in FY16 and plunged to 1.1% in FY 24.
Bank of Baroda had received bids worth Rs 14,215 crore for its Rs 5,000 crore-infra-bond issuance on September 6. Similarly, State Bank of India (SBI) received bids in excess of Rs 18,100 crore against the base issue size of Rs 5,000 crore and Indian Bank’s Rs 2,000 crore bond issuance got bids worth Rs 13,680 crore. Bank of India bond issuances attracted bids amounting to Rs 15,318 crore against the base issue size of Rs 2,000 crore. NaBFID received total bids amounting to Rs 10,310.8 crore for its Rs 1,000 crore bond issuance.
“One bank was recently able to raise funds via 10-year bond at below 7.30% which shows investors perceive the investment in infra projects as less risky and are willing to accept slightly lower returns,” said a head of treasury of a public sector bank.
Bank of Baroda raised Rs 5,000 crore through 10-year infra bonds at a coupon rate of 7.26% in the first week of this month, which was the lowest rate among similar bonds issued recently by public and private banks.
State Bank of India, Bank of Baroda, ICICI Bank, Canara Bank, Bank of India, Indian Bank and Bank of Maharashtra have so far raised Rs 53,811 crore in the current fiscal to finance long-term development projects. NaBFID has raised Rs 8,911 crore via infra bonds in the current fiscal so far. Infrastructure bonds have a tenure of at least seven years and proceeds are utilised by banks to fund long-term infrastructure projects.