Thanks to a mismatch in the expectations of buyers and sellers and also a slight shortage in liquidity, redemptions of corporate bonds have surpassed issuances in the three months to June. At a time when interest rates are rising – the yield on the benchmark bond has gone up by 52 basis points (bps) since the beginning of April – investors are looking for coupon rates that are higher than the rates the borrowers are willing to pay.
Consequently, the value of net issuances in the June quarter was a negative Rs 16,920 crore, latest data from the Securities and Exchange Board of India (Sebi) website showed. “There is a large appetite for corporate bonds but borrowers are unwilling to fork out the kind of interest rates that investors are looking for,” said A Balasubramanian, chief executive, Aditya Birla Sun Life AMC.
To be sure, some mutual funds have not participated in the markets to the extent they normally do. “Some MFs have seen net outflows in duration funds and, as a result, were reluctant to accommodate incremental credits in their portfolios,” said Dhawal Dalal, CIO-fixed income, Edelweiss AMC.
Moreover, a clutch of banks too has not been able to buy bonds given the restrictions on lending. The Reserve Bank of India (RBI) had initiated a prompt corrective action (PCA) plan for some state-owned banks and that has taken away liquidity from the markets. “This has led to some tightening in credit supply to worthy borrowers. So, at margin, there is pressure on the credit supply,” said Dhawal Dalal.
While several banks have raised their MCLR (marginal cost of fund based lending rate), Balasubramanian believes that some borrowers may have nonetheless knocked at the doors of banks since the cost of loans is somewhat lower than the cost of borrowing via bonds or at par. Rates for a ten- year AAA corporate bond paper are hovering around 8.68% currently, which is nearly 70 bps higher than they were in April.
Companies that have the same rating for maturities of five years are now paying 75 bps more to borrow at around 8.57%; for maturities of three years, they are paying 80 bps more to raise money at 8.52%, data from the Fixed Income Money Market and Derivatives Association of India (FIMMDA) shows.
Lakshmi Iyer, chief investment officer-debt & head-products, Kotak AMC, observed that bank loans were costlier in 2017-18. “Now the borrowing cost from banks is also at par, if not cheaper when compared with the borrowings from the capital market. Given similar borrowing costs, corporates borrowings from banks has also re-emerged as an option,” Iyer said.
The benchmark yield moved up by 52 bps to 7.86% on Thursday. Further, FE had earlier reported that the current weighted average corporate bond yield at 9.1% was the highest in two years.
Market experts say that with the introduction of the electronic bidding platform (EBP), there has been a noticeable decline in the participation of merchant bankers who were earlier a bridge between the lenders and borrowers. Consequently, the risk assessment and underwriting commitment that the arrangers would provide do not take place.
“That may be fine for AAA-rated corporates but for the lower-rated borrowers, it is difficult to pool in investors through the EBP,” an expert added.