Funding via debt gets more attractive | The Financial Express

Funding via debt gets more attractive

Debt funding has been a hit despite high interest rates, with equity funding losing favour.

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Telcos also want the government to freeze their contribution to the fund till the time the balance gets exhausted.

By Siddhant Mishra

Mobilisation of funds via debt has been the preferred route for companies, with ₹77,431 crore being mopped up in November, show data from the Securities and Exchange Board of India.

This was in comparison to ₹36,762 crore in October, and ₹47,704 crore in November 2021. The number of issues, too, jumped to 143 in November 2022 from 91 a year earlier and 117 in October 2022.

Debt funding has been a hit despite high interest rates, with equity funding losing favour. Though ₹13,445 crore was raised via equity funding in November, which was more than times October’s figure of ₹2,910 crore, it still paled in comparison to ₹63,440 crore raised in November 2021.

The volatility in equities has increased the risk factor, which is pushing firms to take a safe approach, say experts.

Softening of inflation is also a major factor, say executives.

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“Domestic bond markets saw a deluge of issuances in November and December because of relatively stable interest rates and improved outlook on regulatory stance on policy rates. The inflation print also tapered off from the highs of 7.79% to 6.77% and 5.88% in October and November, respectively. The market expected a gradual reversal in the sustained increase in policy rates, thereby calming the otherwise volatile FY23 bond markets, said Ajay Manglunia, MD and head (investment grade group), JM Financial.

Manglunia added that low spreads between corporate and sovereign securities and negative systemic liquidity encouraged issuers to tap the market.

The view was mirrored by Lakshmi Iyer, CEO (investment advisory), Kotak Investment Advisors. “Spreads of corporate bonds are compressed vis-à-vis government bonds and the premium is receding. Hence, it makes sense from an issuer’s point of view.”

At the same time, with volatility in equities seen continuing largely on account of rich valuations, global factors like the US Fed’s stance on tightening, and geopolitical issues such as the Russia-Ukraine war and China-Taiwan stand-off, equities are tipped to remain a risky route.

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Availability of funds is another key factor. Jyoti Prakash Gadia, MD of Resurgent India, said the choice between equity and debt is directly linked to ease of availability, quantum of funds and cost of debt.

Given the abundance of liquidity in the aftermath of Covid-19 thanks to the easy monetary policy followed by the central banks, the surplus — including foreign funds — got invested by way of equity for funding corporates. However, the prolonged high inflation globally and tight monetary policies adopted have led to a squeeze in liquidity, he said.

Consequently, corporates are using the debt route. This is with respect to availing of credit facilities earlier sanctioned but not utilised due to lower capacity utilisation. However, with revival of the economy, utilisation of debt is expected to rise, Gadia said.

This is despite the interest rate scenario indicating a rising trend. Iyer said the high credit offtake is a sign that debt funding has the tendency to rise, and the strength in debt funding will likely continue over the next few months.

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First published on: 14-01-2023 at 00:15 IST