With a surge in yields over the last few days following the global selloff in bonds, companies are turning towards the commercial paper (CP) market for their short-term fund requirements, four market participants have confirmed.
Public sector firm Rural Electrification Corporation (REC) has raised Rs1,925 crore through commercial paper maturing in December 2015 at 8.5%, according to bond market experts.
They also confirmed that Power Finance Corporation (PFC) raised close to Rs3,200 crore at 8.19% through commercial paper maturing in late June this year. REC and PFC are regular borrowers in the bond markets.
Experts believe this fund-raising reflects the wait-and-watch approach of firms that believe yields will soften in a few weeks.
“There is no point in issuing bonds for tenures of three years or more in such volatile market conditions when the yields are crossing 8.5% because companies will have to shell out the prevailing high coupon rates till the redemption of the bond. Believing the yields are likely to come down in a matter of weeks, they are relying on CPs so that they would have to pay these rates for a short term,” said a bond arranger who was close to the CP deals.
Many public sector units, including Nuclear Power Corporation of India (NPCIL), NM Tranmission Company, Vizag Transmission, Power Grid Corporation (PGC), PFC and REC, are in line to tap the bond markets and are waiting for a conducive scenario, bond arrangers said.
The 10-year benchmark yield had hit a five-month high of 7.99% after the bond rout and, subsequently, borrowing costs of firms had also shot up in tandem. Short-tenure bond yields had risen as much as 48 bps, which was evident from the difference in the bid and ask rates of a recently proposed bond issue by a PSU, according to information from bond arrangers.
The company had to postpone the bond issue due to demand for higher yields. Experts also believe rates on longer tenure bonds have risen by at least 20-30 bps over the past few days.
“In the near term, the bond yields are unlikely to fall considering the uncertainty we see in the global markets. Any softening in yields will require further clarity by the Reserve Bank of India on rate cut expectations,” said Ashish Jalan, assistant vice-president, SPA Securities.