Corporate Bond Issues Up 75% In April-August Amid Flood Of Liquidity

The central bank infused short- and long-term liquidity into the markets in the aftermath of the Covid-19 crisis to ensure financial conditions remain conducive amid an unprecedented economic crisis. This prompted well rated corporations to borrow at lower rates in the market even as banks hunkered down fearing a jump in bad loans.

Corporate bond issuances rose by 75% to over Rs 2.27 lakh crore between April and August this year compared with Rs 1.29 lakh crore a year earlier, shows Bloomberg data.

Since the start of the calendar year, corporates have raised Rs 3.58 lakh crore through the bond markets, a 13% increase over last year.

Last year, there was a drop in issuances since there were bond defaults by large issuers which also led to a slowdown in the money markets, said Siddharth Chaudhary, fixed-income fund manager at Sundaram Asset Management Co. “This year, the issuances are much higher due to the T-LTRO money, but since most of it has been deployed issuances have slowed down since July.”

The RBI infused Rs 1.5 lakh crore via targeted long-term repo operations in March and April to allow banks to raise long-term funds for onlending.

Will The Surge Last?

Madan Sabnavis, chief economist at CARE Ratings, said that the surge seen in earlier months is now flattening as there is a lull in bond borrowings from NBFCs, which raise bonds for onlending.

“Lenders are re-evaluating their lending strategies which is why the overall bond issuances will be lower going forward,” Sabnavis said. “Whereas for non-finance companies, that borrow for investment purposes, it depends entirely on when the investment cycle picks up again.”

Chaudhary also sees a slowdown. Investors are mainly looking to purchase shorter-term corporate bonds and liquidity in the five-year bucket is drying up, particularly for finance companies, which means that there is some stress emerging, he said.

Another uncertainty is the quantum of central and state government borrowings.

According to data from CARE Ratings, states have borrowed a total of Rs 2.97 lakh crore between April and September this year, 51% higher than last year. The central government has borrowed Rs 7.1 lakh crore, up 73% over a year ago.

“A big overhang for corporate bond prices is the prospect of higher borrowings by state governments, which have been allowed to run higher a fiscal deficit to compensate for goods and services tax shortfall. Further, state government borrowings, if done through bond markets, would be concentrated in the same tenors where majority corporate bond issuances take place,” said Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership.

“Therefore, any extra issuance in the corporate bonds space could face additional competition, which is why we are already seeing some pressure in the 3-5 year bucket, which had otherwise benefited earlier in a big way from the T-LTROs,” he said.

“Though the RBI has allowed banks to absorb more state government bonds through regulatory changes, the issue is whether banks would consider it prudent to buy duration assets at what are stretched prices in historical context,” Upadhyay said. The yield curve could thus stay steep unless the RBI steps in with bond purchases under the open market operation program. A steep yield curve would then have a bearing on corporate bond yields as well, he said.