Despite a slow start by the corporate bonds in the current fiscal, issuances are likely to gain pace and even surpass last year’s number, say bond market experts.
“One cannot judge the quantum merely by the pace of issuances in April because the first quarter is the time when issuances remain slow. Moreover, we saw a global sell-off in bonds which had led to a surge in yields. I expect the volume this fiscal to surpass the FY15 number,” said Shashikant Rathi, senior vice-president & head investments, ALM & capital markets at Axis Bank.
In April, corporate bond issuances crossed R20,000 crore where as in the same period last year, the figure was above R23,000 crore. In May 2014, it was slightly higher than R9,000 crore.
The pace should pick up in June and one may see more or less the same quantum of issuances this fiscal as was saw in FY15, said Ajay Manglunia, senior vice-president, fixed income at Edelweiss Securities.
Last fiscal, companies and banks had borrowed nearly R4 lakh crore through the corporate bonds, about 46% higher than FY14. However, the non-food credit growth touched a multi-year low of 9.75% in FY15.
The shift in borrowing towards the corporate bond market was due to lower yields — borrowing cost — compared with bank lending rates.
At present, the primary market bond yields for a AAA-rated public sector company are in the range of 8.40-8.75% medium to long tenures. Also, it must be taken into consideration that the recent global sell-off in bonds was responsible for the prevailing rates which are 20-50 basis points higher than what they used to be in the beginning of fiscal. However, the lowest base rate or the minimum lending rate of banks is at 9.75%.
Rathi believes if the bank lending rates fall by another 50-75 basis points — which in practical scenario seem difficult — and the yields continue to remain at the prevailing levels, one could see some shifting of corporate borrowing from the bond market to the loan market.
Otherwise, the prevailing 100-130 bps difference is a huge discouragement for any possible U-turn by corporates towards banks for their borrowing purposes.
“Bond yields have hardened as commodity prices have risen leading to a global rethink on inflation expectations.
Higher yields may not imply that corporates are shifting to bank borrowings at this stage,” said Sandeep Bagla, associate director at Trust Group.
Market participants believe yields will remain at these levels unless there is a clarity on the interest rate regime. The yields on corporate bonds are likely to remain in the range of 8.50-8.75% at least in the near term, Rathi said, adding if the rates come down by at least 5 to 10 basis points, one can expect issuers to start approaching the market.
As far as sectoral spread is concerned, some of the names which are regular borrowers in the market will continue to maintain their positions in terms of volumes, say bond arrangers. Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and Power Grid Corporation (PGC) are some of the names that could top the list when it comes to the volume of issuances, according to market experts.