Identifying new sources of funding may play a key role in changing the current scenario.
By Hariprasad Radhakrishnan
Amidst an environment of risk aversion, a lion’s share of investments in the private placement NCD market were cornered by the top 10 issuers in 2019. Meanwhile, the lower-rated issuers went for public issues to raise money.
As much as 64.1% of the market share in the debt private placement market was accounted for by the top 10 largest borrowers as of November, against 49.6% in 2018. The firms have raised Rs 2.88 lakh crore as of early December, compared to Rs 2.24 lakh crore a year ago, shows data from Prime Database. The top 10 issuers included Housing & Urban Development Corp, HDFC, Indian Railway Finance Corp, LIC Housing Finance, National Bank for Agriculture & Rural Development (Nabard), National Housing Bank, Power Finance Corp, REC, Small Industries Development Bank of India (Sdibi) and SBI. The debt private placement market comprises corporate bonds and non-convertible debentures (NCDs).
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Mahendra Kumar Jajoo, head- fixed income, Mirae Asset Global Investments (India), said that the investments have been going towards the top issuers due to the risk aversion as a fallout of the IL&FS crisis.
The coupon rates for long-term NCDs of the top borrowers with a tenor of 10 years ranged from 7.48-9.1% in the year gone by. “For the better-rated names that have not been impacted, the transmission (of repo rate cuts) has been good and they have been able to access the market at competitive rates. Currently, their rates are down by more than 100 basis points compared to the levels prevailing in September last year,” said Kumaresh Ramakrishnan, chief investment officer – fixed income, PGIM Mutual Fund.
For instance, Indian Railway Finance Corp, which issued 10-year NCDs worth Rs 2,845 crore at an annual coupon rate of 8.55% in February, saw its borrowing costs decline over the year. In November, the coupon rate of 10-year NCDs worth Rs 2,455 crore issued by the firm fell by about 100 basis points to 7.55% per annum.
The appetite for risk has been affected by AAA-rated borrowers defaulting. “When AAA-rated borrowers default, it comes as a big jolt to the market. Thus, during the initial part of the year, spreads were very wide because of high risk aversion. However, over the course of the last 2-3 months, we are seeing a narrowing of spreads,” said Pranav Haldea, MD, Prime Database.
Meanwhile, the number of public issues of NCDs also saw a rise even as the amount raised through the retail route saw a decline. As many as 31 public issues of NCDs have taken place as of November 2019, against 20 in 2018.
However, the volume raised declined to Rs 15,334 crore as of November, compared to Rs 30,701 crore for the whole of 2018, as per data from the Association of Investment Bankers of India (AIBI). Jajoo said that companies which are relatively strong, but unable to raise money from the wholesale market, opted for public issue of NCDs. “They also need to diversify funding base. Some of them have mobilised some amount, but it is not a big market,” he said.
The public issue of NCDs are relatively more expensive and time-consuming. “Lower rated issuers, who are not able to raise money through private bond markets, have had no option but to come out with retail public issues, which are typically at a higher coupon rate, take more time and are costly,” said Haldea.
The trend is expected to continue for the next couple of quarters, he added. Identifying new sources of funding may play a key role in changing the current scenario. “Growth remains negative and credit market continues to be tight. Until some of these companies start to get funding from new sources, there continues to be an atmosphere of suspicion and fear. The atmosphere has to improve for things to change,” said Jajoo.