First-Time Issuers Test Bond Markets Amid Flood Of Liquidity
Bond markets have seen a steady trickle of first time issuers raise funds over the last two months.
Indian bond markets have seen a steady trickle of first time issuers raise funds over the last two months despite a highly risk averse environment. Banks, flush with funds raised via the Reserve Bank of India’s targeted long-term repo operations, have been the notable investors in these issues, at least three debt capital market bankers told BloombergQuint.
Since the beginning of April, 11 companies have tapped the bonds markets for the first time, raising a total of Rs 1,340 crore in the form of non-convertible debentures. This is based on primary market issuance data available from the National Stock Exchange, Bombay Stock Exchange, Bloomberg and Central Depository Services (India) Ltd.
On May 28, Patanjali Ayurved Ltd. raised Rs 250 crore through three-year NCDs at a coupon rate of 10.10 percent. This is the first-time that the Baba Ramdev-led ayurveda-based skincare and food company has tapped the bond markets. Badve Engineering Ltd, an auto-component manufacturer, also raised Rs 60 crore through a three-year bond at a coupon rate of 8.85 percent on Thursday.
Of the 11 first-time bond issuers, five companies are in the financial-services sector, two in the power sector, two are related to engineering and manufacturing, one is a consumer goods maker and one in the media and publishing business.
Banks Deploying T-LTRO Funds
On March 27, the RBI announced that it would provide banks Rs 1 lakh crore through targeted long-term repo operations for a period of three years at the prevailing repo rate. Half of these funds had to be invested in bonds and commercial paper through the secondary market, while the other half had to be invested via the primary markets.
A second round of T-LTRO, intended to channel liquidity to non-bank lenders, saw banks raising Rs 12,850 crore.
According to an April 27 report by Motilal Oswal, large corporates, state-run entities and strong non-bank lenders issued Rs 5.21 lakh crore worth bonds and NCDs in the month following the central bank’s T-LTRO announcement.
While the banks have deployed 50 percent raised via the first T-LTRO 1.0 in the secondary market, the debt market bankers cited earlier estimated that around 10-12% of the funds meant for primary market debt papers is yet to be deployed. Funds left undeployed attract a penal interest rate from the RBI.
“Since banks are working with their clients on the credit side, the bond route offers an efficient method for pricing against the T-LTRO funds available with banks. Investing in bonds is quicker and offers stable flows for the companies and fixed returns in a downward rate cycle for banks,” said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial Products Ltd.
Companies that have bank borrowings may not be able to raise a fresh loan very quickly for working capital needs due to the Covid-19 situation, so through the bond route banks would be taking a credit call for a longer period, say three-years, but with better spreads, he said.
A debt captial market banker with a private lender said banks are happy to buy these maiden bonds because they have the T-LTRO money. Without that source of funding, these first-time issuers may find it difficult to raise funds in a risk averse market, this banker said while speaking on the condition of anonymity.
Mutual Funds Still Risk Averse
All of these bonds have a credit rating of AA or A, shows the data collated by BloombergQuint. As such mutual fund interest in these issuers remains limited.
“There may be some interest from some funds depending on their schemes but en masse the appetite for lower-rated entities is very scarce,” said Lakshmi Iyer, chief investment officer- debt and head of products, Kotak Asset Management Company.
Much of the liquidity in the secondary markets is in AAA-rated paper. According to a May 24 report by I-Peritus Solutions and Services Pvt. Ltd, only 10.1% of the trading activity is in bonds that have a AA rating, while A-rated bonds make up only 2.5% of trades. AAA-rated papers account for 85.3 percent of outstanding bonds in liquidity terms, the report said.
Since the new issuers fall in a category with limited liquidity they may be unviable for mutual funds.
A debt fund manager told BloombergQuint that some of these companies have leveraged their banking relationships to get funding through the capital markets rather than direct loans. Even though a bank can secure the loan with a security cover there is still a credit risk of giving a direct loan in this environment. Since these entities have an investment-grade rating, the bond route is an attractive option for bankers, the fund manager said on the condition of anonymity.