8.5% coupon rate for AAA-rated REC bonds stirs up market participants

Bond market participants were baffled by an unusual deal done by government-backed REC Ltd, which raised Rs 1,247 crore from the market for bonds maturing in two years, seven months and 15 days.

The AAA-rated public infrastructure finance company offered 8.5 per cent for the money.

The deal is unusual because just two days ago, NTPC, another AAA-rated government firm, raised a three-year fund at 7.93 per cent.

The plan of REC was to raise Rs 500 crore, with a greenshoe option of another Rs 750 crore. Top lead managers for the deal were HDFC Bank, PNB Gilts and Axis Bank, apart from eight others. Bond dealers say there was no change in financing conditions in the two days.

“This shows some desperation on REC’s part. There is no reason to raise the money at this cost. The maturity is also very unusual, but that is okay if there are a few investors arranged for the fund. The highest bid was only of Rs 300 crore. We are very surprised,” said a senior bond arranger.

According to a senior official with REC, the issue was just for testing waters before raising more money from other sources.

“Currently, the market is anyway sensitive to NBFCs. So, we are just playing around. This is one-time issuance and does not set any precedent. Once we have concluded raising funds through external commercial borrowing (ECB), our rates will stabilise,” said the official, requesting anonymity.

But bond market participants do not agree that REC can be clubbed with other NBFC. REC’s bond tenure was less than that of NTPC.

“On the last day of April, Power Finance Corporation (PFC) raised 15-year money at 8.79 per cent. REC’s bonds were way shorter in duration. Even if you consider that REC has a financing problem, it should not have paid more than 8.15 per cent,” said a senior bond arranger.

The forced merger of PFC with REC posed a few challenges for both the power finance companies. For REC, in particular, it meant losing concessional line of credit that it uses for financing flagship energy schemes.

REC was suffering from financing troubles and the merger decision encouraged rating agencies to put REC on ‘credit watch negative’, severely hurting the firm’s borrowing plans from the market.

The NBFC sector, as a whole, has been facing financing problems after IL&FS defaults last year. The recent downgrade of Reliance Capital has aggravated the problem. But it is the private sector NBFCs, rather than the public sector companies, that have suffered more.

Moreover, spreads over equivalent maturity government bonds have also increased and the market is discriminating between companies and NBFCs, too. If an AAA-rated manufacturing company is raising money at 100 basis points above equivalent maturity government securities (G-Secs), an AAA-rated private NBFC will be raising the same money at 150-160 basis points above G-Secs.

If REC’s move is seen as a rate signal by the market, then cost for private NBFCs will go up further. 

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