Top-rated companies tap into low money market rates as liquidity improves

Most highly rated companies are enjoying rate benefit of more than 150 basis points in their working capital raised from the market

The working capital cost for India’s top-rated companies has fallen significantly since the IL&FS-induced credit crisis a year ago. 

They are now raising money very close to the overnight repo rate, as liquidity improves in the banking system to more than Rs 2.5-trillion surplus. Rates on AAA-rated papers up to one year have fallen from 8.51 per cent on November 27, 2018, to 6.1 per cent now, much sharper than a 100 basis points fall in the 10-year bond yield. 

“On one hand there is this near assurance of easy monetary condition from the RBI (Reserve Bank of India), and sloshing banking system liquidity, on the other hand skewed preference of investors for safe haven and tepid supply of commercial papers (CP) have brought down money market yields considerably, although, for limited entities,” said Soumyajit Niyogi, associate director at India Ratings and Research. Most highly rated companies are enjoying rate benefits of more than 150 basis points in their working capital raised from the market. For example, Reliance Industries raised 41-day money in November 2018 at 7.68 per cent. In November this year, it had raised 117-day money at just 5.45 per cent. 

Similarly, Aditya Birla Finance raised 121-day money at 5.75 per cent, against 7.9 per cent for 32 days last year. 

A year ago, the credit market nearly froze as IL&FS started defaulting from September, and governance concerns emerged in systematically important non-banking finance companies (NBFC). 

The bond market still gave money to good companies, but at a high rate. For average companies though, both the bond and credit market became inaccessible as lenders became risk averse. 

The situation has not improved much for lower rated companies though, but they have started getting access to the bond market. For example, a large NBFC raised 45-day loan at 9.5 per cent in November this year. The same company had raised 35 day money in November 2018 at 8.23 per cent. 

“Financing condition was always good for top rated companies. But for us, the situation has not improved much in the last one year,” said a senior executive with am NBFC. 

But the lower rates and increased issuance should bring back confidence in the market. 

“If the situation continues, risk aversion and excessive risk premium should normalise in the market,” said Niyogi.