Borrowing cost of firms may fall 30 basis points

Easing liquidity and possible rate cut by Reserve Bank of India later this month could act as triggers bond issuances likely to increase

With easing liquidity and expectation of repo rate cut by the Reserve Bank of India (RBI) later this month, the cost of borrowing through private placement of corporate bonds might drop further by 25-30 basis points in the near term, resulting in an increase in bond issuances by the corporates.

“In anticipation of a rate cut by the RBI, the cost of borrowings has already dropped in the last few days. A further drop by 25 basis points can be expected after the rate cut,” said Arvind Konar, head of fixed income, Almondz Global Securities.

The yield on ‘AAA’ rated corporate bonds of 10-year and 5-year tenure has already dropped by over 50 basis points since the beginning of this fiscal. ‘AAA’ is the highest rating given by credit rating agencies and it signifies that a company has an extremely strong capacity to meet its financial commitments. In fact, companies have been going slow in anticipation of a rate cut. “In the last one month issuances by way of private placement of bonds has slowed down because many are expecting that the cost of borrowing will drop by 30 basis points after January 29,” said an official of a leading issue arranger.

Those planning to raise funds by way of private placement of bonds in this quarter also include companies which had recently tapped the market with tax-free bond issuances but were not as successful as last fiscal in mopping up funds.

According to Ajay Manglunia, senior vice-president, Edelweiss Securities, in this quarter (January-March), issuances will be more compared to the previous quarter. During the last quarter, companies seemed to borrow more to boost their balance sheet.

The Street has discounted a 25 basis points repo rate cut by the RBI in the third-quarter review of the monetary policy on January 29. This resulted in cost of borrowing falling by 20-25 basis points in the last 15 days, said issue arrangers. Now, expectations are building up for a 50 basis points cut in the repo rate.

But a few companies are not willing to take any chance by waiting till the monetary policy review. They are planning to take advantage of the recent 20-25 basis points drop in the cost of borrowings. Such companies include Power Finance Corporation, planning to raise Rs 150 crore with a greenshoe option for an unspecified amount.

The company has invited bids from issue arrangers on Tuesday. It plans to sell five-year bonds with a put/call option after two years.

Similarly, Rural Electrification Corporation is planning to raise Rs 5,000-6,000 crore through private placement of bonds this quarter. However, the company might hit the market a few days ahead the monetary policy review, because if the RBI maintains status quo on interest rates the yields might harden.