Regular borrowers in the corporate bond market seem to be turning to commercial paper, at least on a temporary basis, even as corporate bond yields continue to remain high, according to information provided by market participants. Rural Electrification Corporation (REC), which is a regular issuer of bonds, has issued an 87-day commercial paper at 7.83%, two sources said.
“REC was looking to issue bonds, but might have decided to hold back because of the prevailing high yields. The company was able to issue short-term CP at 7.83%, but had it come to the bond market to issue a 10-year paper, the yields would have been in the range of 8.55-8.6%,” a bond arranger said.
Steel Authority of India (SAIL) raised Rs3,000 crore through short-term commercial paper at 7.84% some days back, according to market sources. The state-owned company had recently issued three-year bonds at a coupon rate of 8.35%.
Ajay Manglunia, senior vice-president, fixed income at Edelweiss Securities, said since the commercial paper yields are at least 60-65 bps lower than the corporate bond yields, firms are choosing to raise funds through the CP route while anticipating the yields on corporate bonds to come down going forward.
“They do no want to lock in yields at such high levels while issuing a long-tenure paper under current market conditions,” said Manglunia. This trend was seen even in mid-May when yields on corporate bonds had shot up following a global selloff in bonds.
In the run-up to RBI’s June monetary policy, the yields had cooled down a bit with some firms starting to make a comeback to the bond markets. However, the central bank’s hawkish tone and its statement that the rate cut has been front-loaded led to a hardening of yields again.
But bond market continues to be the preferred route of borrowing by corporates due to a difference of at least 100-150 bps between the bank lending rates and bond yields.
In the first two months of this fiscal, loan books of banks have shrunk by Rs2.44 lakh crore, according to RBI data. At the same time, companies/banks have mopped up more than Rs 1 lakh crore through the corporate bond market, according to Sebi data.