India’s corporate bond market is likely to see a flurry of issuance over the next few weeks as the sharp fall in the coupon rate is expected to enthuse issuers who have been on the sidelines in the last couple of months, following a hawkish statement from the Reserve Bank of India at the start of the current fiscal year. The coupon on the AAA-rated one-year corporate bond yield has fallen about 25 basis points since the first week of April to 7.03%, while the coupon on the three-year AAA-rated bond has declined by 30 basis points to 7.28%. The five-year AAA-rated bond has seen its coupon drop to 7.32% from 7.78% in early April and the coupon on the 10-year AAA-rated bond has fallen 45 basis points to 7.53%. “There is one set of borrowers who are waiting to take advantage of this short-term movement in yield. There is some pent-up demand, and over the next few days we will see supply coming in,” a trader with a private sector bank who is not authorised to speak to the media said.
Apart from public-sector enterprises such as Rural Electrification Corporation and Power Finance Corporation that issue bonds at regular intervals, companies and banks like Reliance Ltd, SAIL and State Bank of India are weighing their options and could hit the market soon, two sources close to decision making said. Some of these companies are also looking to tap the overseas market through masala bonds, the sources added.
A significant portion of the money raised through these bonds would be used for refinancing existing debt and meeting working capital requirement as the need for capital expenditure is limited due to the sluggish economic environment, traders said, adding that capital expenditure for most corporates will be muted till there is a significant growth in demand and the private investment cycle picks up. The coupon on the corporate bonds have declined tracking the fall in government bonds yields.
You might also want to see this:
The 10-year benchmark bond yield has fallen more than 50 basis points since the beginning of May to 6.46% on hopes that the RBI will reduce its key repo rate in August after two successive inflation data surprised on the downside. The latest data available from markets regulator Sebi shows that corporate bond issuance in the January-March quarter stood at Rs 2.09 lakh crore, up from Rs 1.56 lakh crore in the previous quarter and Rs 1.78 lakh crore in the year-ago period. The data for the current quarter will be published in mid-July. The total private placement of corporate bonds on the National Stock Exchange and the Bombay Stock Exchange was Rs 97,207.60 crore in April and May, data from Sebi showed, compared with a total of Rs 6.41 lakh crore in fiscal 2016-17.
The growth in corporate bond issuance will continue to come at the cost of growth in bank credit, traders said. The cost of borrowing from banks, which is based on their marginal cost of fund based lending rate (MCLR), is at least 100 basis points higher than the yields in the bond market. The banks have seen their credit growth fall to multi-decade lows in the past few quarters. The non-food credit growth stood at Rs 76 lakh crore as on June 09, up 6.6% year-on-year, but lower than Rs 77.88 lakh crore on March 31, 2017.