Sebi guidelines on corporate bonds likely to keep yields elevated

Bond dealers anticipate a hardening of yields because of the Securities Exchange Board of India (Sebi) rules mandating a large corporate entity to borrow from the bond market.

Already spreads between the bonds issued by better-rated firms and the government yields are as high as 100 basis points. The spreads will continue to remain at these levels and may not come down to their previous normal of 50-60 basis points, said to Ramkamal Samanta, vice-president, investments, Star Union Dai-Ichi Life Insurance.
For companies rated AA+, the spread has widened to as high as 180 basis points for dated bonds, which should be a matter of concern.

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 (NBFC) 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.  

“Existing issuers are likely to face more competition- especially NBFCs, and yield curve will get adjusted accordingly. Additionally, Banks presence will 
become critical for demand-supply dynamics in the bond market,” said Soumyajit Niyogi, associate director at India Ratings and Research.
According to Sebi’s definition, a large corporate entity is one that has an outstanding long-term borrowing of at least Rs 1 billion, a credit rating of AA and above, and aims at getting financing through borrowings of above one year.

“A listed entity... shall be considered as a Large Corporate (LC) and such an LC shall raise not less than 25 per cent of its incremental borrowing during the financial year... by way of issuance of debt securities,” Sebi said in a circular.

The move will definitely increase depth in the corporate bond market, but it may not be that helpful for lower rated firms, which struggle with their funding needs, said bond dealers.

“There is a ready market for AA rated bonds anyway. Lower rated companies need the market support much more. However, if better rated firms keep issuing their bonds, it becomes further difficult for lower rated firms to get financing,” said a senior bond dealer with a private underwriter firm.  

One important aspect of the Sebi’s guidelines would be that lot of companies will have to now disclose additional details that they never did because they did not tap the bond market. Now their disclosures would be in much detail.

“Broadening number of issuers in the capital market should improve information dissemination, develop market depth and could ensure better term loan pricing,” Niyogi said.

In the bond market, even one day delay in servicing debt is considered a full default. A company raising money from the bond market will have to notify exchanges if any of its bonds are getting delayed in repayment. This is something that these companies don’t have to do while delaying on bank loans.

To avoid such disclosures, many well known firms did not raise money from the corporate bond market. However, now that it is mandatory, these companies will have to mandatorily disclose much more than what they are used to.

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