Bond market warms up to NBFCs, but India's top-rated companies benefit

Financial companies are also lining up equity issues, while planning some dollar bond issues. In domestic markets, gold loan companies are actively raising bonds.
India’s top-rated private and government-owned companies may be enjoying record low rates in markets for their short-term money, but the situation has not improved much for lower-rated firms, particularly in the financial sector. However, sporadic issues of bonds have begun.

The liquidity situation for non-banking financial companies (NBFCs), which had been facing a crunch on this front for some time now, is improving. But even in this segment, the benefit has mostly gone to well-rated companies which have started issuing debt papers in larger numbers.  

Financial companies are also lining up equity issues, while planning some dollar bond issues. In domestic markets, gold loan companies are actively raising bonds.

“The bond market has slowly started accepting NBFCs. The para banking sector has also started getting healthy loan support from banks. The NBFC crisis could be nearing its end,” said a senior banker, requesting anonymity.

Low yields

The foreign branches of Indian banks have lined up heavy issues of certificates of deposits (CDs) in offshore markets. State Bank of India (SBI) and Bank of India, through their various foreign branches, have started raising funds through CD issues, taking advantage of the low rates overseas. However, banks cannot bring those funds onshore, and will have to use it for their own local needs.

State governments, which had to pay as much as 150 basis-point higher than government securities in the first auction of the financial year, are enjoying low yields now as they borrow at ultra cheap rates.

On Tuesday, the auction of five state development loans (SDL) reflected such low cut-offs that states opted to borrow more. For example, Maharashtra raised Rs 1,500 crore against its planned Rs 1,000 crore in three-year bonds at 4.76 per cent. Rajasthan raised Rs 750 crore, against its planned Rs 500 crore through a 30-year bond at 6.70 per cent. Similarly, Tamil Nadu raised Rs 250 crore additional in each of its 9-year and 30-year securities as it got the money at 6.60 and 6.70 per cent, respectively.
Soumyajit Niyogi, associate director at India Ratings and Research, said the cut-offs were at “historic lows”, which is prompting states to raise money. More states could line up borrowing owing to the low rates, caused by abundant liquidity in banks, said bond dealers.

Risk aversion

NBFCs have also benefitted from various liquidity and guarantee measures taken by the Reserve Bank of India (RBI) and the government. But the buyers are still tilting towards AA and above papers, even as some A rated companies, both from financial and non-financial sectors, have stepped up issues.

The risk aversion is still visible in the markets, but there is a perceived assurance that the worst could be over for the NBFC sector, unless the global economy and as an extension the Indian economy head towards choppy waters due to worsening of the Covid-19 crisis.  

“The abundant liquidity and risk aversion in the banking system is now driving down yields on short-term commercial paper of top-rated companies to historic lows, as banks explore yield pickup alternatives to parking money with the RBI through the reverse repo window,” said Nachiket Naik, head of corporate lending at Arka Fincap.

State owned NTPC last Friday raised three months’ money at 3.34 per cent, a record low. ICICI Securities, on the same day, raised similar maturity papers at 4.05 per cent. ICICI Securities Primary Dealership had on September 2019 raised one-month commercial papers at 5.75 per cent. Chennai Petroleum Corporation (CPCL) had on June 18 raised 2.5 months’ money at 3.39 per cent. The same firm had raised one-month money at 5.40 per cent in September 2019.

In the secondary market, HDFC commercial papers are trading at 3.5-4.5 per cent, depending upon the maturity. Hero Fincorp papers maturing on October 30 were trading at 5.10 per cent, while L&T’s papers maturing in December were available at 3.75 per cent, even as L&T Infra was trading at 5.30 per cent. NTPC and IOC papers, in the same market, are trading at 3.15 and 3.20 per cent, respectively.

Buzzing with activity

The corporate bond market, though, has started buzzing with activity. There were a number of good issues last week.

HDFC, AAA rated, raised 10-year bond worth Rs 4,000 crore at 7.25 per cent, while JM Financial Credit Solutions (AA) raised three-year bonds worth Rs 100 crore at 9.1 per cent. 

Muthoot Homefin, which has the same rating, raised three-year money at 8.5 per cent, Chola (AA+) raised two-year bonds at 7.2 per cent, Fedbank Financial (AA-) raised three-year money at 9 per cent, Tata Housing (AA) raised 1.5 year bonds at 8.75 per cent, Aavas Financiers (A+) raised 1.5 years money at 6.6 per cent and Esskay Fincorp (A) raised 3-year money at 11 per cent.

This means that investors are no longer going by ratings alone, as companies in the same rating bracket are paying different rates on their bonds. This also shows that investors, mostly banks, are more than willing to buy commercial papers for lower coupons, instead of taking duration risk on corporate bonds.

However, “the current moratorium on loan portfolios and perceived asset quality challenges of BFSI players, has resulted in higher yields for non-industrial house backed NBFCs and housing finance companies”, Naik said.

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