Corporate bond issuances growth may slow as higher rates hurt: Dealers

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Corporate bond issuances are expected to grow at a slower pace in the second half of this financial year as interest rates rise, money market dealers said.

Considering the large quantum of issuances by Small Industries Development Bank of India, Power Finance Corporation, and National Bank of Agriculture and Rural Development, among others, companies will also tap the market to meet funding and working capital needs, the dealers said.

“As the economy returns to normalcy and banks continue to hike lending rates, we might see a shift in quality issuers moving towards bond issuances as a source of funding,” said Anand Nevatia, fund manager at Trust Mutual Funds. “Borrowing through bonds helps corporates lock in their cost of funding and may be a preferred mode in a rising rate scenario.”

The pace of issuances will be slower than in the first half of FY23 as rates have increased sharply, a dealer with a merchant bank said.

Issuances in April-October 

Corporate entities raised Rs 3.09 lakh crore through bonds from April to October, with the highest issuances in July and September, according to data from the Securities and Exchange Board of India.

Companies and banks raised Rs 77,274.82 crore in April-June, Rs 1.97 lakh crore in July-September and Rs 34,699.38 crore in October.

Dealers said issuances during April-October were a mix of various tenures. They expect issuers to prefer longer tenures where rates are more stable than at the shorter end.

“Long-term interest rates are expected to remain stable, hence borrowers may opt for long-term funds to avoid volatility and increase visibility on the interest outgo,” said Jyoti Prakash Gadia, managing director at Resurgent India.

Rate trajectory 

The interest rate on corporate bonds has surged since the Reserve Bank of India started increasing the repo rate. Rates at the shorter end of the curve have increased very sharply compared to long-term bonds.

The central bank has so far raised the repo rate by 190 basis points since May and it currently stands at 5.90 percent. One basis point is one-hundredth of a percentage point.

According to market participants, the yield on three-year bonds has risen by more than 30 basis points, whereas there was a marginal rise for 10-year corporate bonds.

The yield on three-year bonds was at 7.50-7.52 percent on November 14, while it was at 7.60-7.65 percent for 10-year bonds. The 10-year benchmark government bond yield was at 7.2808 percent.

Dealers do not expect a further sharp increase in rates on bonds because the expected rate hike by the central bank has already been discounted by the market and bonds are trading accordingly.

“Corporate bonds are trading at the best spread today. I don’t think there will be too much change in rates till March 2023,” said Umesh Kumar Tulsyan,  managing director of Sovereign Global Markets, a New Delhi-based fund house. “We don’t see too much rise in the interest immediately as the 6.50 percent terminal rate is discounted by the market. Even borrowing costs will remain the same.”