Yields soften, but companies hold back bond plans over IL&FS overhang

Even as bond yields have softened by about 50 basis points in the last two months, companies would still like to wait out on their bond plans as credit spread is refusing to come down after the IL&FS crisis. 

The 10-year government bond yields have softened about 50 basis points, thanks to continued liquidity infusion by the Reserve Bank of India (RBI), bringing down the corporate bond yields too. 

However, the spread between government bond yields and corporate yields have widened. The reason is that even as there is ample reason for investors to cheer about the fixed income market, they are not really enthused in increasing their exposure to the corporate sector considering the defaults of the IL&FS Group. 

The group's AAA grade rating was downgraded to D (default) grade in a matter of 45 days, shaking the confidence of the market in the NBFC segment, and as an extension to the corporate sector. 

The spread had widened soon after the IL&FS crisis, and has continued to remain as high as 100 basis points above the benchmark government securities, even for the top-rated firms. The 10-year bond yield is at about 7.60 per cent, from more than 8 per cent in September. 

The yields have come down due to softness in oil prices, and consistent secondary market bond purchases of the RBI. Under its open market operations (OMOs), the RBI has bought Rs 400 billion of bonds in September, Rs 360 billion in October and has said it will buy another Rs 400 billion worth in bonds in December. 

"If the RBI continues to do OMOs beyond December, and if oil falls further, we might see a further slide in bond yields," said Hemal Doshi, vice-president, treasury, at SBI DFHI LTD. 

However, the government's budgeted fiscal deficit has already been breached in the first seven months, and if revenues are not growing fast enough, or expenditures are not curtailed aggressively, the fiscal deficit is likely to remain wide, which can put brakes on the rally in bond prices. 

"The corporate bonds yields mirror sovereign bond yields, along with a credit spread. We have already witnessed a credit event in the form of IL&FS, which pushed the credit spreads to move up," Doshi said. 

The spreads between government bonds and lower-rated firms are even wider than 100 basis points, and it is unlikely to come down to their previous normal of 50-60 basis points, Ramkamal Samanta, vice-president, investments, Star Union Dai-Ichi Life Insurance, said. 

For companies rated AA+, the spread has widened to 180 basis points. 

According to bond arrangers, many firms are holding back their plans to issue bonds in both domestic and international market. This is particularly true for green bonds, which require lower cost of funding to fund sustainable projects. 

"Lots of firms are holding back their plans, waiting for uncertainties to end. Even as the currency has stabilised and oil prices are falling, nothing is certain as of now. RBI is also not clear about its rate plan. So, companies would prefer to wait it out till at least the end of this financial year," said a bond arranger. 

However, in a sign that there is ample liquidity in the system, better-rated firms' three-six months' commercial papers are trading at 7-7.5 per cent. But, those of non-banking finance companies (NBFCs) are at 8.5 per cent and above, reflecting the risk aversion in the non-banking space. The situation may turn even more difficult for the NBFCs if large firms start increasing their debt paper supply from April 1, 2019. 

Low on confidence 

  • The 10-year government bond yields have softened about 50 basis points (bps)
  • The spread between government bond yields and corporate yields have widened
  • Investors are not really enthused in increasing their exposure to the corporate sector considering defaults of the IL&FS Group
  • The spread widened soon after IL&FS crisis, and remains 100 bps above the benchmark


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