Corporate bond issuances slow down amid high interest rates, volatility

Corporate bond issuances slow down amid high interest rates, volatility

Indian Inc raised as much as ₹5.33 trillion during the first seven months of this fiscal through corporate bond issuances, up by 3.2% compared to the same period in FY22. While the fund raised has improved marginally, what is surprising is the sharp slowdown since July.

The fund raised through corporate bonds fell a whopping 43% in July to ₹52,170 crore, by 41.2% in September to ₹73,352 crore and then by rose by 17.1% in October to ₹50,088 crore. What is interesting is that in the first three months of the financial year, bond issuances rose 29% (April), 91% (May) and 39% (June).

From high level in April, the AAA bond yield fell by upto 35-40 bps in mid-May and June. However, between July and October, yields of AAA corporate bond rose again up to 40 bps. Yield of 1-year bond rose from 7.40% to 7.74%, 3-year bond from 7.55% to 7.87% and 5-year from 7.53 to 7.93%, according to data sourced from Bloomberg.

“I think the decision by corporates to tap the bond market eventually boils down to costs. It always depends on the purpose. If they want short-term funds, companies opt for commercial papers or short-term borrowings from banks, which are cheaper. If they want long term funds, they will go for non-convertible debentures (NCDs),” PNB Housing Finance MD and CEO Girish Kousgi told FE.

Kousgi added that earlier, there was a rule that whatever 25% of incremental borrowings should be through NCDs. That rule has changed. Now, depending on the need and if the asset and liability management (ALM) supports, companies will go for NCDs.

The top issuers during the fiscal were HDFC Bank in May (₹15,000 crore) and then in June (₹13,187 crore), Goswami Infratech in June (₹14,300 crore), National Bank for Financing Infrastructure Development in June (₹10,000 crore). Further, State Bank of India’s two issuances of ₹10,000 crore each in August and September also topped the charts.

Karthik Srinivasan, Senior Vice President, Group Head-Financial Sector Ratings at ICRA said that bond issuances were relatively muted in Q2 because of high interest rate.

“Interest rates have started rising quite sharply, while there was extra volatility in the July-September quarter. We have seen some slowdown in bond issuances in Q2. RBI also put in place the incremental cash reserve ratio in August. Bank loan pricing was more competitive in Q2 so that is the reason why we did see a slowdown in bond issuances,” Srinivasan said.

For FY23, corporates raised ₹12.5 trillion through bond issuances. According to a Bloomberg report, rupee-denominated bond sales by Indian companies are set to rise this week, with issuances largely dominated by shadow lenders.

On the outlook for the rest of the financial year, industry experts had a mixed view with some of them being optimistic and others opting for “wait and watch” mode.

“The corporate bond issuances tend to pick in the third quarter and fourth quarter in line with the demand. It will pick up going forward,” IDBI Bank Deputy MD Suresh Khatanhar said.

According to Mahesh Singhi, founder & MD at investment banking firm Singhi Advisors, “With demand for deposits going up and increased borrowing cost in the global markets, we expect the activities in the corporate bond markets in the second half of the FY24 to be little better than first half. Further, many companies are in the midst of major capex plans and infrastructure spend will be higher in the coming months. With the tightening of liquidity and relative lower traction in capital markets, corporates will resort to bond markets.”

If the bond yields rise further, there may be a slowdown in issuances. The moment the yields start declining, you have opportunities in the bond market,” ICRA’s Srinivasan said.

Sanjay Kumar Agarwal, Senior Director at CareEdge said: “The yield movement has been adverse and volatile so companies may be waiting for that to come under control. That is why bond issuances have been lower in September and October. The corporate bond sector looks positive for this financial year. The extreme credit risk aversion that was there last year has also reduced. We will see institutional issuance by AA and AA- issuers. Corporate bonds have become more competitive from last year. Banks have a pricing based on external benchmarks. With the rise in external benchmarks, banks loans have also become costlier and deposit rates have also increased. The corporate bond market has become more competitive in comparison to the bank loan market. A good chunk of these issuances going ahead will be long-term vanilla bonds.”