Fund raising: Despite the possibility of a rate cut, NBFCs hit NCD market

Mumbai | Published: August 7, 2019 4:21:08 AM

Market participants expect a repo rate cut during Wednesday’s policy, which in an ideal situation, should lead to a fall in corporate bond yields. In effect, firms that want to raise funds from the bond market could get it at cheaper rates if they wait for the rate cut to happen.

It is noteworthy that the cost of raising funds from the bond market has remained high for NBFCs despite the fall in G-sec yields.

By Bhavik Nair & Shashank Nayar

Despite the possibility of a repo rate cut in the upcoming monetary policy, non-banking financial companies (NBFCs) have chosen to hit the retail non-convertible debenture (NCD) market to raise funds. A few believe that a possible rate cut may not immediately reflect in bonds rated below AAA and any wait for a fall in yields may lead to an opportunity loss.

Market participants expect a repo rate cut during Wednesday’s policy, which in an ideal situation, should lead to a fall in corporate bond yields. In effect, firms that want to raise funds from the bond market could get it at cheaper rates if they wait for the rate cut to happen.

However, in recent times, two NBFCs, namely JM Financial Products and IIFL Finance, decided to tap the retail NCD market without choosing to wait for the potential rate cut to happen. JM Financial is looking to raise up to `500 crore through the issue and is offering a coupon of 10.30% for a 60-month paper in one of its series. IIFL Finance is aiming to raise upto `1,000 crore and in one of the series, is offering a coupon of 9.85% for a 39-month paper. Both papers are rated AA/Stable by Crisil.

As Ajay Manglunia, managing director and head—institutional fixed income, JM Financial, points out, any possible repo rate cut will not immediately reflect in bonds that are rated below AAA. “We see that there are so many opportunities for onward lending in current times as a lot of other finance companies are slowing down. For a company like ours, that has got low penetration and low leverage, this is a wonderful opportunity to scale up — we get better coverage and right pricing. As far as the policy rate cut is concerned, although the yield transmission is quick in G-secs and AAA-rated bonds, it takes a while for the transmission to get reflected in bonds below AAA rating. We don’t want to wait for that to happen before hitting the market as that would be an loss of opportunity for us,” he said.

Prabodh Agrawal, president and group chief financial officer (CFO), IIFL, said the NCD yields have been priced keeping in mind the 25 bps rate cut expected this week. “Corporate bond spreads have widened even as G-secs yields have fallen, due to extreme risk aversion and scarce liquidity in the market. Going forward, we expect the corporate bond spreads to narrow as the risk aversion normalises,” he said.

It is also noteworthy that the cost of raising funds from the bond market has remained high for NBFCs despite the fall in G-sec yields. For instance, after the RBI reduced the repo rate cut by 50 basis points since April, yield on a five-year government bond has fallen by 118 basis points from the highs seen in April. However, the yield on a AA-rated five-year NBFC paper has fallen by only 70-odd basis points from the elevated levels seen during the same period.

Manglunia confirms that the spread on corporate bonds, especially NBFCs, is at an elevated level. “Even on a AAA rated corporate bonds, the spread which used to be at close to 60-80 basis points three months back, is currently trending at 100 basis points. In due course of time with stability returning back, spread compression shall play in favor of investors for sure,” he said. A bond market expert who did not wish to be named told FE that in the present scenario, raising funds is the priority for NBFCs and a mere difference of 25 bps will not matter. “In the credit market, what matters now is the availability of funds, not the rates,” the person said.

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