Corporate bond yields are at a two-year high, according to data compiled by CARE Ratings, which has pointed out that the weighted average yield across all maturities and tenors has risen by 70 basis points (bps) to 9.1% in the seven months to July. CARE noted that corporates are finding it cheaper to borrow through bonds because the average yield at 8.9% so far in FY19 is lower than the interest rates paid by borrowers from banks which stands at 10.11%.
The total issuance amount of corporate bonds for the Q1FY19, including both public and private placements, stood at Rs 1.52 lakh crore, down 32% on a year-on-year (y-o-y) basis, Securities and Exchange Board of India (Sebi) data showed. A Balasubramanian, CEO at Aditya Birla Sun Life AMC, said that illiquidity is a part of the market function and is not a major concern. “Most of the corporates are in a move to pay back their borrowed money to the lenders. This reflects in the companies’ debt to equity ratio that has been reducing. The number of companies that want to borrow from the market has reduced and the companies paying back their debt have increased.
The Fixed Income Money Market and Derivatives Association of India (FIMMDA) rates for a 10-year AAA corporate bond paper was around 8.64% on August 8, up 64 bps from April. Bonds with the same rating for five-year and three-year maturities were up 77 bps to 8.59% and 81 bps to 8.51%.
Lakshmi Iyer, CIO, debt, and head, products, Kotak Asset Management Company, believes that in the rising interest rate scenario mutual fund investors opt for securities that have a shorter maturity so the repricing is better and faster “There is more activity happening selectively in the non-AAA segment where the quantum of these deals are lower. And secondly, now the borrowing cost from banks is also at par if not cheaper when compared with the borrowings from the capital market. So if the borrowing costs are similar, corporates borrowings from banks has also re-emerged as an option. These are among key reasons why corporate borrowings this year has seen a dip,” Iyer said.
The report also highlighted that the spread of corporate bonds over government securities widened to a four-month high in July; at 1.36% it was 32 bps more from than the spread in June. This indicates that the cost of borrowings for the higher rated corporates, the AAA- and AA-rated bonds (which account for over 95% of total traded volumes) rose in July reflective of the risk perception of corporate bonds. Total traded volumes of corporate bonds stood at Rs 54,321 crore in July, 54% less than the traded volumes in June