Corporate bond issuances – mostly dominated by NBFCs – through private placements at the beginning of FY20, in April, fell considerably from the issuances in the previous month.
By Shashank Nayar
Non-banking financial companies (NBFCs) are now able to pick up money at the lowest costs in many months. The average corporate bond spread – the difference between the yields of corporate bonds and government bonds of the same tenure – for five-year paper of AAA-rated NBFCs has fallen to 102 basis points in May, the lowest since October, 2018, according to data compiled by Bloomberg.
Corporate bond issuances – mostly dominated by NBFCs – through private placements at the beginning of FY20, in April, fell considerably from the issuances in the previous month. April issuances amounted to `70,064 crore against issuances of `1.14 lakh crore in March, according to data published by the Securities and Exchange Board of India (Sebi). The lower supply of corporate bonds in April has been a factor that has pushed yields downwards, said a Care ratings report.
For instance, REC had issued a 10-year corporate bond on May 14 at 8.80% at a time when the G-sec traded at 7.45%, resulting in a spread of 135 bps. However, REC issued a similar tenure bond at a coupon rate of 8.97% on March 28, 2018 at a time when the benchmark G-sec traded at 7.46% resulting in a spread of 151 bps.
Dealers believe the moderation in yields and spreads can be attributed to rate cuts conducted by the RBI and the possibility of further rate cuts by the central bank in the June monetary policy meet, coupled with added demand from mutual fund houses on the back of higher foreign flows in liquid funds – papers having maturity below 91 days. “We have already seen inflows in liquid funds amounting to nearly `90,000 crore that is the primary reason for the increased demand, which is bringing the yields and spreads down,” said Mahendra Jajoo, head – fixed income, Mirae Asset Global.
The weighted average yield of corporate bonds across maturities and rating categories in April was 8.65%, 2 bps lower than that in the preceding month and 33 bps lower than December 2018, according to a Care ratings report.
However, at a time when corporate bond yields and spreads for high rated NBFCs have been falling, the marginal cost of funds-based lending rate (MCLR) – the rate below which a bank cannot lend – has been lower than the corporate bonds yields in April.
The average MCLR in April averages at 8.28% while corporate bond yields averaged at 8.79%. “Corporates carrying AAA-rating have been able to borrow at lower rates from the bond market, however, the cost of borrowings for AAA-rated NBFCs and Non-NBFCs (barring HFCs) was higher in the corporate bond market when compared with the MCLR rate,” said experts at Care ratings.