Fund raising through private placement of non-convertible debentures (NCDs) have seen a 31 per cent rise this financial year with over Rs 3.54 lakh crore mobilised till February, against Rs 2.70 lakh crore last year. This is the highest mobilisation through this route with banks, NBFCs, and corporates raising funds from players like pension funds, insurance companies, foreign portfolio investors (FPIs) and mutual funds to retire old debt and for on-lending.
Depending on the rating of an entity and the tenure of the bond, players are able to raise funds at 8.25 10 per cent to 8.75 10 per cent, against the bank rate of 10 per cent above.
With the economy seeing a moderate recovery as compared to weakness in most other geographies, and a softening interest rate cycle is resulting in better participation from FIIs. Data from Prime Databse shows that banks and financial services are the largest
issuers of private corporate debt at approximately 70 per cent, while
power companies had a share of 8.4 per cent, real estate and construction four per cent and telecom 2.6 per cent.
National Bank for Agriculture and Rural Development raised money through bonds via private placement five times during the year to raise Rs 7,515 crore. Reliance Capital hit the market 57 times.
Several companies of the Tata Group, such as Tata Capital Financial Services and Tata Housing Finance, Tata Sons, Tata Motors, together raised money 94 times. Besides, ICICI Bank, Yes Bank, Axis Bank, non-banking finance companies (NBFCs), real estate companies, Reliance Jio Infocomm, L&T Finance, L&T Infrastructure Finance, L&T Housing Finance, L&T Fincorp, HDFC raised money through NCDs via the private placement route.
Dinesh Prajapati, treasury head at Mahindra and Mahindra Financial Services, told Financial Chronicle, “We are regularly raising money through the private placement of NCDs for on lending purpose and also for repaying past liabilities. For AAA rated private NBFCs like us, the coupon for a three-year to 10-year paper ranges from 8.65 per cent to 8.85 per cent. However for public sector undertaking the rate is around 8.25-8.35 per cent with the (yield) curve remaining flat.”
The bonds are subscribed by insurance companies, pension funds, FIIs, bank treasury and mutual funds. “This year, the liquidity in the bond market has gone up with FII participation increasing. There is a view that the Indian economy is likely to do better, sovereign rating is likely to improve, currency will remain stable, fiscal deficit would further narrow. With crude prices remaining on the lower side, inflation would remain at the lower end which would allow the RBI to cut interest rates and thus it would improve their returns on debt investments,” added Prajapati.
Ashutosh Khajuria, president treasury and head of network, Federal Bank said the yields on corporate bonds are much low than the base rates of top banks. “Triple AAA rated NCDs are at 8.75-9 per cent while banks base rates are 10 per cent or above. So the interest rate differential is more than 1.25 per cent. As a result companies and most NBFCs are raising money through NCDs.”
“In fact some banks are also buying these bonds as they are sitting on surplus liquidity with no credit growth and this is better than putting money in RBI’s reverse repo at 6.5 per cent. By the time credit growth comes back, these bonds will come up for maturity and banks could utilise the money towards credit growth,” explained Khajuria.
Base rate of top banks such as SBI, ICICI Bank, HDFC Bank is at 10 per cent. Unlike commercial papers (CP), which have a tenor of less than one year, NCDs are bonds with a tenor of minimum one year and above.
Ajay Manglunia, head of fixed income at Edelweiss Financial Services said, “There are a few companies that are adding capacity so the objectives are on lending and repaying past liabilities. In the bond market, you can raise resources below 9 per cent while banks would lend above 10 per cent. Last year, many entities shifted from bank borrowings to the market. Larger NBFCs want to diversify their funding and have raised money through public issue route while the majority have gone for private placement targeting the wholesale investors.”
Hitesh Shah, director, SK Financial Capital Advisors said, “FIIs have exhausted the limit in government bonds while there is still headroom to invest in corporate bonds.”
With companies raising money with commercial papers and NCDs (public and private issuances), non-food credit growth slowed to 10.9 per cent at Rs 65,24257 crore for the fortnight ended March 6, 2015.
A Kotak Institutional Equities says, “FIIs could be a big change that we are seeing today as compared to the past. Over the past couple of years, we see the RBI taking a different approach towards investments by FII, which we think could aid the growth of the corporate bond market in India. Steady relaxation through increase in limits, changes to the withholding tax structure and a strong economy compared to other regions imply that India is becoming a favoured destination for many large foreign institutional players.”
“The RBI has tweaked the regulation many times, which was primarily aimed to build a strong secondary market. Currently, we have an upper ceiling of Rs 1,244 billion ($25 billion) in the G-Sec market and Rs 2,443 billion ($51 billion) in the corporate bond market. We have very limited headroom today in the G-Sec market (Rs 1.3 billion, 99.9 per cent utilised) though the limit in the bond market is fairly high at Rs 639 billion (75 per cent utilised).
“Our discussions with various participants suggest that the biggest challenge faced by FIIs in the corporate bond market is liquidity in various corporate instruments making it a challenge for building a portfolio. There are no near-perfect hedge instruments in these investments making it difficult to take exposure with as much ease as we are seeing in the G-Sec market. Absence of a strong CDS (credit default swap) is another key reason for lower contribution to trading activities,” said the Kotak report.
It added, “A softening of interest rate cycle, especially in a base-rate regime of banks, implies that the supply of paper is likely to remain high and demand will be fairly robust as the flows increase, given the strong performance of funds (mutual funds have generated more than 15 per cent returns in the past year). However, it could be a structural change as well. The RBI has been actively looking at newer ways to make the bond market a far more robust market place than we have seen in earlier changes. Introduction of newer instruments, modifications to existing programmes and allowing greater participation from FII suggest that these changes could be more than cyclical. The government has made changes to the tax structure and looking at ways to strengthen the legal protection of a bond holder, as the current structure overwhelmingly favours banks.”
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