Are Private Corporates Tapping Bond Market For Borrowing Instead Of Bank Loans?

This comes even as public sector undertakings, banks, and non-banking financial companies continue to dominate borrowing, with over 90% of the overall issuances.

More private companies are tapping the bond market for the first time, but that is not necessarily changing the broad mix.

“We are seeing more and more first-time issuers. For example, Tata Communications’ NCDs issue last month—Happiest Minds; Goswami’s (Shapoorji Pallonji Group firm) mega issue; there are reports of Titan coming up with a bond issue, but that essentially does not change the broad fix," said Aditya Gore, head of international coverage and research at Nuvama Fixed Income.

"There were a few new entrants last year with the first-time issue, but that has not happened this year again. So, it totally varies and depends on various factors," he said.

In the non-banking/lending space—after banks and NBFCs—public sector undertakings continue to dominate the corporate bond market, along with real estate investment trusts and infrastructure investment trusts.

“PSUs tap the bond markets regularly and continue to do so as the rates for them are much cheaper compared to bank loans. Many REITs and InvITs are in the regulars of tapping the bond market, mostly in 'AAA' category, with the yield pickup,” said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap LLP.

Bank rates are based on the marginal cost of funds-based lending rate, and with many lenders hiking the MCLR, the bond route becomes more accessible in a cost-effective way, according to experts.

In terms of private corporates, Nirma Ltd. is planning a bond issue. Samvardhana Motherson International Ltd., Sheela Foam Pvt., Godrej Properties Ltd., Tata Projects Ltd., Torrent Power Ltd., Kalpataru Projects International Ltd., Tata Power Co., and Tata AIG Insurance Co. are also among those borrowing money from the bond market.

“That market is slightly picking up, but not expecting as huge as other bond markets... Money is coming majorly to high-yield categories. More banks are expected to tap the bond market as liquidity is tight. AT1 issues are expected to come in,” said Srinivasan. “As far as PSUs are concerned, long-term papers are more in demand.”

This comes even as public sector undertakings, banks, and non-banking financial companies continue to dominate borrowing, with over 90% of the overall issuances.

More private companies are tapping the bond market for the first time, but that is not necessarily changing the broad mix.

“We are seeing more and more first-time issuers. For example, Tata Communications’ NCDs issue last month—Happiest Minds; Goswami’s (Shapoorji Pallonji Group firm) mega issue; there are reports of Titan coming up with a bond issue, but that essentially does not change the broad fix," said Aditya Gore, head of international coverage and research at Nuvama Fixed Income.

"There were a few new entrants last year with the first-time issue, but that has not happened this year again. So, it totally varies and depends on various factors," he said.

In the non-banking/lending space—after banks and NBFCs—public sector undertakings continue to dominate the corporate bond market, along with real estate investment trusts and infrastructure investment trusts.

“PSUs tap the bond markets regularly and continue to do so as the rates for them are much cheaper compared to bank loans. Many REITs and InvITs are in the regulars of tapping the bond market, mostly in 'AAA' category, with the yield pickup,” said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap LLP.

Bank rates are based on the marginal cost of funds-based lending rate, and with many lenders hiking the MCLR, the bond route becomes more accessible in a cost-effective way, according to experts.

In terms of private corporates, Nirma Ltd. is planning a bond issue. Samvardhana Motherson International Ltd., Sheela Foam Pvt., Godrej Properties Ltd., Tata Projects Ltd., Torrent Power Ltd., Kalpataru Projects International Ltd., Tata Power Co., and Tata AIG Insurance Co. are also among those borrowing money from the bond market.

“That market is slightly picking up, but not expecting as huge as other bond markets... Money is coming majorly to high-yield categories. More banks are expected to tap the bond market as liquidity is tight. AT1 issues are expected to come in,” said Srinivasan. “As far as PSUs are concerned, long-term papers are more in demand.”

Many corporates may possibly be tapping the market alternatively to diversify their source of funds because the arbitrage between capital markets and the loan market is not significantly different any more in recent times.

“Pricing arbitrage between capital markets and the loan market has sunk lately. Assuming some corporates will be able to borrow at a negative spread to MCLR, that will still be expensive than the bond market based on the current rates. For example, five-year tenure in the bond markets can be at around 7.60% rate, but the same in the loan market may be around 7.70-7.75%,” said Gore.

Though in the case of AAA rated private corporates, coupon rates are typically slightly lower as compared with government entities given the default risks are lower in PSUs. “Demand is there for corporate bonds. However, supply is less,” said Srinivasan of Rockfort Fincap.

For good quality issuers, bond markets do offer a good opportunity to raise funds, and all these issuers would go to the market which is more cost-competitive for them, said Karthik Srinivasan, senior vice president and group head of financial sector ratings at ICRA Ltd.

Large companies are required to raise 25% of their incremental borrowings by the way of issuance of debt securities.

The securities market regulator recently relaxed its norms for borrowings made by large corporates. It has introduced an incentive-based system, in place of the present penalty-based mechanism for non-compliance with the borrowing mandates.

Corporate bond issuances rose to Rs 2.7 trillion in Q1 FY24 from Rs 2.6 trillion in Q4 FY23 and Rs 1 trillion in Q1 FY23, according to data by ICRA. The issuance was partly led by large issuances by HDFC Ltd., prior to its merger with HDFC Bank Ltd. in July. This follows from the all-time high bond issuances of Rs 8.7 trillion in FY23.

The corporate debt has come down. Therefore, there seems to be no material requirement for many firms to opt for equity raising, said experts.

"Equity-debt levels at a broader level have come down and possibly the corporates, who are opting for the debt market, are trying to refinance their existing or marginal debt and choosing the options based on requirements as it differs for various businesses, according to Srinivasan of ICRA.

He estimates that the second quarter bond issuances may not be as high. "It possibly would be lower in the vicinity of about Rs 2 lakh crore as June and July issuances have been dull, though we have seen some pick-up happening in September as rates have again started stabilising,” he said.

ICRA expects bond issuances to remain strong for the remainder of financial year 2024, supported by competitive cost vis-à-vis bank funding as well as better investor appetite as long-term yields are likely to have peaked out. Accordingly, the agency expects overall issuances to cross the previous year’s peak, rising to Rs 9-9.5 trillion in fiscal 2024.