Corporates Make A Dash For Debt As Yields Plateau

The businesses are making a beeline for the bond market with a view on peaking policy rates as well as demand from investors for better yielding assets.

While it is early days, domestic companies have already raised around 400 billion rupees ($5.01 billion) through private placements of bonds from Aug. 1 to Aug. 24, against the average monthly fund-raising of around 335 billion rupees in the first four months of this financial year, data compiled by Reuters showed.

"Many companies had delayed their fundraising plans in the first quarter, as the central bank had started its rate hike cycle aggressively, which led to a sharp upside and volatility in yields," said Venkatakrishnan Srinivasan, founder and managing partner at debt advisory firm Rockfort Fincap.

"But things seem to be stabilizing now, encouraging companies to fulfil their funding needs."

The Reserve Bank of India started raising interest rates in an unscheduled policy meeting in May, and has boosted its key policy rate by 140 basis points since. A majority of market participants feel the bulk of tightening has already been done, and that will limit the rise in yields.

Large state-run companies such as Power Finance Corp and NTPC raised funds recently, while REC and Indian Oil Corp are expected to tap the market by next week.

NTPC raised 10-year funds at 7.44%, while Canara Bank is paying 7.48% for its 10-year Tier II bonds, just marginally above benchmark 10-year bond yields around 7.30%. Yields on notes of similar companies were trading at a spread of around 40-50 basis points with the benchmark yield in the first quarter.

"The bulk of the rate hikes is already behind us and ... yields have eased from their recent highs, so investors are not expecting any major rise from this point," said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial.

"(This) has increased the appetite for investing in corporate papers after a dry first quarter."

Even though India's headline retail inflation has stayed above the central bank's upper tolerance level of 6% for the last seven months, RBI Governor Shaktikanta Das has said inflation has peaked and bond yields reflect that trend.

The benchmark Indian bond yield has stayed around 7.30% for the past one week, even as 10-year U.S. yield scaled 3.10% and benchmark Brent crude prices rose above $100 per barrel.

"Overall, corporate bond issuance from AAA-rated companies is very low and investors, especially mutual funds, which have mandates to park funds in such notes, are lapping up whatever supply is coming, especially at a time when government bond supply is ever increasing," said Raju Sharma, head of fixed income at IDBI Mutual Fund.

BANK ISSUANCES

Indian banks are also expected to tap into the bond market, as credit growth gathers steam in the second half of the financial year.

Rockfort Fincap's Srinivasan expects banks to issue bonds from now until the end of September.

Earlier this month, Bank of Baroda raised 20 billion rupees via 7-year infrastructure bonds, while Canara Bank raised 20 billion rupees through 10-year Tier II bonds on Thursday.

Market participants expect large state-run lenders State Bank of India, Bank of Maharashtra, Union Bank of India and Bank of Baroda as well as private lender HDFC Bank to raise around 120 billion rupees via Basel III-compliant additional Tier I perpetual bonds in the next two weeks.

Banks have also increased their fundraising through issuance of certificates of deposits, given they remain averse to raising fixed deposit rates sharply and as banking system liquidity surpluses have reduced.