Bond Business: Yields on NBFC, HFC papers fall, but spreads at high levels

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Published: June 16, 2020 7:32 AM

According to information provided by dealers, HDFC recently raised Rs 4,000 crore via 10-year paper at 7.25%.

Bond Business, NBFC, HFC, corporate bonds, NPA levels of NBFC, covid 19 crisis, HDFC bondsAjay Manglunia, MD and head of institutional fixed income at JM Financial, said in the current environment, investors are worried about potential NPA levels of NBFCs.

Absolute yields on corporate bonds of private-sector non-banking finance companies (NBFCs) and housing finance companies (HFCs) may have come down in recent times, but their spreads continue to remain at elevated levels.

According to information provided by dealers, HDFC recently raised Rs 4,000 crore via 10-year paper at 7.25%. Bloomberg data show that the firm had paid 7.40% for a similar tenor paper during February end. Though the yield fell in recent times, the spread on HDFC’s 10-year bonds currently remains close to 146 basis points compared with the 103 bps seen in February end.

Anshu Kapoor, head of Edelweiss Private Wealth Management, said though there is some improvement in spreads, the market is acting with caution in these times. “We are on the path to improvement in the corporate bond spreads, but we are far from normalisation. It is difficult to say with conviction that something negative won’t happen in the coming times, leading to reversal in the spreads. That is why the market is a lot more cautious. Funds are flowing towards high-quality papers, but even there, subscription comes at a price. That is why you see spreads on good quality papers still remaining at elevated levels compared with the pre-Covid levels,” Kapoor said.

M&M Financial Services also raised over `800 crore recently via papers having tenors of three years and two years. According to dealers, the firm paid 7.25% for its three-year paper recently. For a similar tenor paper, the company had paid 7.6% during early February, indicating a fall in yields in recent times. However, the spreads currently remain close to 272 bps compared with 147 bps in February.

Ajay Manglunia, MD and head of institutional fixed income at JM Financial, said in the current environment, investors are worried about potential NPA levels of NBFCs. “As a result, market participants want to remain safe and take exposure in a cautious way. Spreads have come down a bit from the elevated levels in March, but we are still far from reaching the pre-Covid levels. I believe the compression in spreads will not happen in a hurry as investors will definitely want to assess the damage of the Covid-19 crisis. A clear picture may only come by the end of this fiscal,” Manglunia said.

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