Firms queue up to raise money through bonds

Rates at 3-year low; companies raised Rs 31,193 cr from market this financial year

Companies are cautiously increasing their borrowing from the corporate bond market, taking advantage of interest rates that are at a three-year low, indicating the economy could be turning around.

Borrowing from the corporate bond market in the financial year so far has seen a sudden spurt, even as companies struggle to utilise their full installed capacity in the absence of robust recovery in economic growth.  

An analysis by Business Standard, based on Bloomberg data, shows in this financial year, companies have raised Rs 31,193 crore from the market. In the same period a year ago, they raised Rs 21,587 crore. It was Rs 10,805 crore in 2014.

The analysis leaves out the financial sector, but retains consumer-focused non-bank financial companies (NBFCs) like automobile loan firms. Commercial paper maturing in less than a year has not been included in the analysis, as well.

The yields on 10-year government bonds are now trading around 7.25 per cent, a level earlier seen in June 2013. Corporate bonds get issued at a spread over equivalent maturity government bond yields. For the highest rated firm, the spread is about 50 basis points, which increases as credit ratings worsens. Therefore, AAA-rated companies are able to raise money now at 7.75-7.85 per cent.

“It is a good time to raise money from the market, as not only have rates fallen; the investor base has also increased after provident funds were allowed to invest in AA-rated bonds,” said Alpana Dave, head of institutional sales, Crest Debt Capital Market. “Spread between government securities and corporate bonds have narrowed and 15-years public sector undertaking bonds are getting  traded below eight per cent. Also there are indications of credit growth picking up in the coming days. We are seeing many primary issuances of non convertible debentures, she said.”

But, bond dealers also say companies are proceeding slowly and not showing as much enthusiasm as they should when rates are at a multi-year low. Arrangers and dealers point to tepid capacity utilisation at firms.

Reserve Bank of India (RBI) data for October-December 2015 show firms were able to use only 72.5 per cent of installed capacity. It is an improvement over sequential quarters but still less than the 78 per cent in the fourth quarter of 2012-13, when utilisation peaked. The lacklustre corporate bond market scenario is complemented by low bank credit growth, which has remained below sub-10 per cent for more than a year.

“The borrowing is strictly need-based and not necessarily hindered by cost. Right now, companies are sitting on excess capacity and, therefore, there is no need to expand, even as borrowing costs are getting lower,” said Soumyajit Niyogi, at Indian Ratings and Research.

According to a senior official of a bond arranger and underwriter firm, the bonds firms are raising are mainly to replace, or roll over, their previous debt. The number of issuances are coming down even, as the amount raised by the same firm could be higher, he said.