Public Sector Borrowers Prepare To Return To Primary Debt Markets
Members of the media and other attendees queue at the entrance to the reception of the Reserve Bank of India (RBI) in Mumbai. (Photographer: Prashanth Vishwanathan/Bloomberg)

Public Sector Borrowers Prepare To Return To Primary Debt Markets

Public sector enterprises have started to line up short-term borrowing plans as they seek to take advantage of targeted long term liquidity being offered by the Reserve Bank of India to banks.

The central bank is offering Rs 1 lakh crore to banks provided they use this to invest in corporate bonds. Half of the funds raised by a lender via the targeted long term repo operation must go towards debt issuances in the primary market, the regulator has specified.

The liquidity offered by the central bank brought immediate relief to secondary debt markets, where credit spreads eased by 75 to 150 basis points, across different issuers. The credit spread is the additional interest rate sought by investors over government bond yields.

With interest rates easing, some firms may return to the primary markets.

According to two debt capital market bankers, several state-owned entities are lining up fresh bond issues. These include Rural Electrification Corporation Ltd., Power Finance Corporation Ltd., Indian Railways Finance Corporation, National Highways Authority of India and NHPC Ltd.

PSUs will benefit the most from the central banks’ liquidity facility because of their quasi-sovereign nature, said the first banker quoted above, speaking on the condition of anonymity.

Ideally these state-run entities would like to raise between Rs 2,500 to Rs 5,000 crore but given the tepid appetite, the size of the base issue may be kept low at around Rs 500 crore, the second banker said.

Emails sent to the companies seeking clarity on their debt fund raising plans went unanswered.

Dip In Primary Market Activity

As foreign portfolio outflows and redemptions across some local debt funds picked up, corporate bond yields spiked in March. This brought primary market activity to a near standstill.

India’s primary corporate bond market saw its the weakest first quarter since 2016, with 656 issuances between January and March this year, compared to 985 in the same period last year.

In total, the January-March quarter saw Rs 2.18 lakh crore in fresh corporate bonds raised compared to Rs 2.67 lakh crore in the same period last year, according to Bloomberg data.

Primary corporate bond issues in January and February this year were actually higher compared to the same period in 2018 and 2019. But activity collapsed in March due to the uncertainty and risk-aversion stemming from spread of the coronavirus in India and globally.

A Staggered Return

While RBI’s targeted long term repo operations may bring back some activity to the primary debt markets, it may be slow. Non-bank lenders, in particular, who need liquidity to keep lending going are watching market conditions before they come back in.

Public sector financial institutions may find it easier.

“When we look at public finance institutions they fundamentally act on behalf of extending the governments’ fiscal policy to an extent. So I do not think investors are making too much of a judgement call on credit quality between the different PSU issuers,” said R Sivakumar, head of fixed-income at Axis Asset Management Company.

Among private NBFCs, Bajaj Finance Ltd., L&T Financial Services Ltd., Aditya Birla Finance Ltd. and HDB Financial Services Ltd. are also planning to issue bonds at the right time, the bankers quoted above said. Several smaller NBFCs—Muthoot Fincorp, Muthoottu Mini Financiers, Sakthi Finance, Kosamttam Finance and Axiva Finvest—are also planning to raise bonds in the coming weeks, according to data from Bloomberg.

“Strong NBFCs will be able to access the markets, but the near term will be a challenge for other NBFCs because investor appetite will be running low as they are hoarding cash as liquidity preference is very strong,” said Sivakumar.

Housing Development Finance Corporation Ltd. will issue Rs 10,000 crore worth of bonds of three-year maturity, on the National Stock Exchange’s Electronic Bidding Platform on April 8, it informed exchanges on April 3. The bond issue will have a base size of Rs 2,500 crore with a green-shoe option to retain up to Rs 7,500 crore, the company said in an exchange filing.

Among large non-financial corporates, Mukesh Ambani-led Reliance Industries Ltd. informed exchanges that it would issue up to Rs 25,000 crore worth of non convertible debentures in tranches from time to time, on a private placement basis. The funds may primarily go towards repaying the company’s debt which is maturing in the coming months, the bankers quoted above said.

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Grasim Industries Ltd. has also approved an NCD issue worth up to Rs 1,000 in one or more tranches, on a private placement of bonds, according to a stock exchange filing on April 1.

Banks may buy fresh bonds issued by large corporates and NBFCs, but pricing is hard to determine at this point, the first of the two bankers quoted above said.

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