Corporate borrowing costs fall despite rise in spreads

Updated: July 18, 2019 2:06:25 AM

In addition, top rated non-banking financial companies (NBFCs) are also able to raise money cheaper even as spreads for the 10-year paper issued by these shadow banks have widened to 136 basis points (bps) in July, the highest since February 2019.

non banking financial company, NBFC, money cheaper, shadow bank, banking news, MCLR, RBI, Reserve Bank of India, market newsFor instance, REC had issued a 10-year paper at a coupon rate of 8.3% on June 25, but had to pay 8.8% for a similar tenor bond issued on May 14.

By Shashank Nayar

Indian corporates are being able to keep their borrowing costs under control as yields for the 10-year ‘AAA’ rated private and public sector company papers have been consistently dropping in July even as spreads continue to widen.

The average corporate bond spread (difference between the yields of corporate bonds and government bonds of the same tenure) for the 10-year paper of AAA rated corporates widened to 131 basis points in July, highest since March, 2019, according to data by fixed income money market and derivatives association (FIMMDA). Yields of the 10-year top rated public sector companies (PSU) closed at 7.29% on Wednesday, which is a two-year low.

In addition, top rated non-banking financial companies (NBFCs) are also able to raise money cheaper even as spreads for the 10-year paper issued by these shadow banks have widened to 136 basis points (bps) in July, the highest since February 2019.

For instance, REC had issued a 10-year paper at a coupon rate of 8.3% on June 25, but had to pay 8.8% for a similar tenor bond issued on May 14. Again, LIC Housing Finance had issued a 10-year paper on July 12 at a coupon rate of 7.9%, while it had to pay 8.7% for a similar bond issued on March 25.

Average yields in April have been lower than the marginal cost of fund based lending rate (MCLR), the rate below which a bank cannot lend. According to data published by the Reserve Bank of India (RBI), the average one-year MCLR for scheduled commercial banks in June amounted to 8.7%, 38 basis points higher than the average corporate bond yield. Yields across ratings and maturities averaged at 8.32% in June 2019, according to a Care Ratings report.

Bond market dealers believe it is only the top-rated NBFCs and corporates that are receiving substantial amount of interest for their bond paper, but it is not the case for companies with below ‘AAA’ rating, which is leading to less money chasing the corporate bond market. “With the bulk of the carnage regarding the NBFC sector behind us, the small pain points do remain, leading to less money chasing the corporate bond market,” said Lakshmi Iyer, CIO-debt, Kotak AMC. “While corporate bond yields have also come down they haven’t come down with the same gusto as G-secs hence the widening of spreads,” Iyer added.

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