Debt Funding Set To Hurt Corporates As Tight Liquidity Pinches

March is usually heavy in terms of fundraising as companies scramble to finish their borrowing plans for the financial year. However, this year it is likely to come at a cost, five people with knowledge of the matter told NDTV Profit.

This is because the spread between benchmark 10-year government bond and corporate bond has widened by 55 basis points as on March 6, against a spread of 35 bps on Jan. 1. Yield on the 10-year benchmark 6.79%, 2034 government bond was at 6.68%.

While the recent measures by the Reserve Bank of India to boost liquidity in the banking system has had an impact on the yield curve but slowdown in demand from insurance companies and large supply of state loans has also weighed, treasury officials said.

"Most companies would have completed their borrowing plans for the year but a few large Issuers would still be keen to tap the debt market even at these higher spreads, to fund pending disbursements or some last moment fresh lending deals," Shameek Ray, debt capital market head of ICICI Securities Primary Dealership, said.

So far, the benchmark 10-year corporate bond was suppressed by insistent demand from pension funds, insurance companies and provident funds.

On Nov. 21, NDTV Profit had reported that Life Insurance Company of India was said to have been buying good quality corporate papers.

This demand from long-term investors had made the 10-year bond an attractive proposition for state-owned companies, non-banking financial companies and even UltraTech Cement Ltd., Grasim Industries Ltd. and Larsen & Toubro Ltd., one of the five people quoted above said.

With books of most long-term investors filled with corporate papers before the end of the financial year, this demand has now abated.

Continued tightness in liquidity conditions, selling by foreign institutional investors and large amounts of state loan supply has also led to spreads getting repriced. Earlier this week, states had raised Rs 50,500 crore.

This has spilled over to the corporate bond market, hampering effective transmission of a rate cut.

"We are of the opinion that there is a need to address this 'spread widening' and believe that open market operations may be considered in state government securities as well to smoothen the spreads," SBI Research said in a report.

As of Mar. 6, liquidity in the banking system was in the deficit of Rs 56,909 crore as against a deficit of Rs 2.07 lakh crore witnessed in January.

This was because the central bank resorted to a series of market intervention tools such as variable rate repo auctions, open market operation purchases of government bonds and long-term dollar-rupee buy/sell swap auctions.

"...long swap deal of RBI should have a cascading impact on money market. The spread between a repo rate and a Corporate Bond yield was as much as 125 basis points northwards over the repo rate, while buying activity in secondary market had also been under pressure….the present swap will ensure transition to money market yields," the report said.

March may be a difficult month for borrowers but the RBI's move to lower risk weights for bank lending to NBFCs will bring some respite in the coming months, people said.

Additionally, the RBI is also expected to further cut interest rates in April, which might lead to some correction in yields.