After hitting a new high in 2017, corporates cut back on bonds in 2018

Image: istock
After scaling a new high in 2017, there has been a slowdown in corporate borrowing through bonds as yields rise and corporate capital expenditure (capex) is yet to pick up in the country. The total bond borrowings by corporates (companies, excluding banks and financial services) are down 25 per cent during the first six months of the current calendar year, compared to the same period in 2017. 

In all, companies have raised around Rs 650 billion through 168 bond issuances during the current calendar year through till July 12, against Rs 868 billion (through 251 bond issues) raised during the corresponding period last year.

For full year 2017, corporates raised a record Rs 1.8 trillion from the bond market, up 30 per cent on a year-on-year basis (YoY) through 528 bond issues. 

“Bond issues are down sharply in the current calendar year as yields have gone up, reducing the attractiveness of bonds over bank borrowings. Many firms are also waiting for stabilisation in the market to issue bonds,” says Somasekhar Vemuri, senior director, CRISIL Ratings.

The analysis is based on the bond borrowings by all companies, excluding financials since 2012, according to the Bloomberg data. The current year data is year-to-date through July 12. 

Reliance Jio has been the single-largest borrower in the current calendar year so far and the telecom operator has raised Rs 75 billion through four bond issues, according to the data from Bloomberg. It is followed by Vedanta (Rs 50 billion) and ATC Telecom Infrastructure (Rs 42 billion). Other big corporate borrowers in 2018 include Bharti Airtel, Bharti Telecom, NTPC, IKEA India, Adani Infrastructure, and Tata Sons.

Banks and non-banking finance companies have also slowed on fundraising from the bond market though the numbers or issues from the sector have exploded. Financials have raised Rs 2.05 trillion from the bond market during the first six months of the current calendar year, down nearly 10 per cent from the Rs 2.27 trillion raised during the corresponding period a year ago. 

The numbers of bond issuances by the sector were, however, up 72 per cent YoY, suggesting a surge in borrowings by mid- and small-sized retail lenders. 

There have been 1,062 bond issuances by various entities, including state-owned corporations, during the current year so far, up from 772 bond issues during the same period last year. The total borrowings are, however, down 12 per cent during the period to Rs 2.9 trillion, from Rs 3.3 trillion in the same period last year. 

The last calendar year was a high for the bond market, with Indian companies raising a record Rs 6.1 trillion through 1,607 bond issues. 

Analysts attribute the decline to a rise in bond yields (read interest rates) and continued slowdown in capex by the private corporate sector. 

Bond yields are up nearly 130 basis points in the last one year, reducing the arbitrage gap between banks’ lending rate and bond yields.

This has pulled corporates back towards banks from the bond markets. Last year, the interest rates in bond markets were lower than the banks’ lending rates. 

“Till a few months back, bond yields were lower than the banks’ marginal cost-based lending rate (MCLR). That provided an incentive for borrowers to tap the capital market and refinance expensive bank debt with bond issue proceeds. This opportunity is now gone as bond yields are close to MCLR, especially for AAA and AA ratings space,” says Soumyajit Niyogi, associate director, India Ratings.

Rating agencies say borrowings have been generally tepid by the corporates. “The fund requirement remains low for the corporate sector. The capex is right now largely happening in sectors such as automobiles, consumer goods, and cement. Most firms in these sectors are cash-rich and can fund growth through internal accruals,” adds Niyogi. 

Others expect a revival in bond issuances due to the lending constraints facing banks. “With constraints on banks to support an incrementally large credit demand of NBFCs, the bond issuances from NBFCs would continue, though there can be periods of slow growth, like we have seen in the first quarter of the current fiscal year,” says Anil Gupta, sector head, financial sector ratings, Icra.

Rating agencies say bond market volumes will increase when yields exhibit more stability and issuers accept higher bond yields as a reality, and investors agree that the current levels are attractive and do not wait for yields to go up further.