Better-rated companies borrow heavily from India's bond market

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A proposal by the Securities Exchange Board of India (Sebi) to make large firms borrow 25 per cent from the bond market is not a big challenge, since many of them tap the fixed income market regularly. 

Bond market investors are willing to give money to companies rated AA and above, according to the criterion in the Sebi consultation paper.

“For companies rated AA and above, the bond market is cheaper than bank loans. But if the same rules have to be applied for companies rated A or below, the proposals will be wishful thinking,” said Prabal Banerjee, group finance director at the Bajaj group.

Sebi’s discussion paper proposes that the norms be made effective from April 2019, but many companies have been doing it already for quite sometime now, according to a Care Ratings analysis.

Analysing the March 2017 annual data of 1,427 large corporates, the agency found that about 55 per cent of the companies did not enter the bond market earlier. But those who did had a strong presence, with about 43 per cent of their incremental borrowings coming from the bond market.

The 1,427 firms (including banks) in the sample, had a total of Rs 20.5 trillion outstanding borrowings from the bond market as on March 2017. This was 85% of total value of the outstanding corporate bond.

When it comes to the criterion of AA and above rating, the number of companies shrinks considerably.

There are 376 large corporates having outstanding long term borrowings of Rs 1 billion and above plus credit ratings of AA- and above, the rating agency found. Companies having debt of Rs 25 billion and above have a strong presence in the bond market.

“Data also shows that corporates in the lower band of Rs 3-5 billion and Rs 5-10 billion have witnessed almost half of its funding done through the bond market.”

Out of the total 376 large corporates having higher rating, 109 have still not entered the bond market. An analysis by Business Standard shows that corporates are increasing borrowings from the bond markets year after year.

In 2016, non-financial companies raised Rs 2.2 trillion from the bond market. This increased to Rs 2.9 trillion in calendar year 2017 and so far in this calendar year, firms have raised about Rs 975 billion. Since bond market is pre-disposed towards better rated corporates, it can be assumed that a significant portion of these funds go to companies with a good credit rating.

The increased participation of large companies in the bond market is important for two reasons. One, it helps companies raise cheap funds, and second, a deep corporate bond market facilitates a number of newer initiatives to blossom. This allows firms with lower ratings to access the bond market.

One such instrument is Credit Default Swaps (CDS), which was introduced in 2010, but it does not have a single outstanding deal.

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