New borrowers tap corporate bond market

Many of them are SPVs engaged in roads, ports and SEZ projects

The corporate bond market is showing signs of maturing slowly, and has started serving the purpose it was always meant to – of helping companies, especially in the infrastructure sector, to find an alternative source of funds outside of banking channels.

In absolute terms, companies have increased their capital-raising from the bond market as interest rates continue to remain low, even as banks have reduced their lending rates by about a full percentage point in the past one year.

This year since January to May 31, companies outside the consumer finance and non-infrastructure financial services business, have raised Rs 55,297 crore, against Rs 40,095 crore raised in the same period last year.

Depending upon the tenure of the bond and the issuer ratings, bonds in the past two years were raised between 6.5% and 24%.

In the past two years, a lot of new names have started accessing the bond market. Many of them are special purpose vehicles (SPVs) engaged in roads, ports and special economic zone projects. Most often than not, these SPVs are floated by reputed companies such as Larsen & Toubro (L&T), Tata Power and Sterlite Power, but the SPVs are raising money, based on their own business case and not riding on the parent’s balance sheet. State government entities have also become active in the bond space.

Kudgi Transmission (L&T Infrastructure Development Projects), East-North Interconnection Company (Sterlite Power), Uttar Pradesh Power Corporation, Hazaribagh Ranchi Expressway (IL&FS Transportation), Maithon Power (Tata Power), Jhajjar Power, Oriental Nagpur Betul Highway are the new entrants in the Indian corporate bond market space, dominated by financial services NBFCs.  

Some of these issuers are in the market to raise only a few crores of rupees from the market, albeit at a high rate, considering their low ratings. But the fact remains that companies across the spectrum have started tapping the bond market and this trend is expected to gather momentum.

“We have seen new issuers coming in the market to raise funds. They could be SPVs of big names, but the bonds are not necessarily issued using the names of the parents,” said Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership.

Market participants also say the emergence of infrastructure debt funds (IDF) has changed the game for many small names in the infrastructure space. IDFs raise funds to buy bonds of the infrastructure companies, which are used to provide refinance support to these projects. This may explain the spurt in many road, toll and port projects in the bond market space.

“Now with large volume of operating assets, there is better alignment of project cash flows with requirements of bond holders. Bondholders look for assets with assured or predictable revenue visibility, which under-construction projects do not offer. Bonds raised at the SPV level will be able to refinance bank debt,” said Manish Agarwal, leader, capital projects & infrastructure, PwC India.