Corporate debt issuances dip 50% in fourth quarter

The volume of corporate debt issuances in the quarter ended March 31 declined by 50 per cent, compared to corporate debts issued in the year-ago period. Volatile markets, tight liquidity and high interest rates made these issues unattractive in the fourth quarter.

According to credit-rating agency ICRA, companies raised Rs 23,000 crore through bond issues in the fourth quarter, compared with Rs 54,000 crore in the corresponding period last year. In the October-December period, bond issuances were estimated at around Rs 32,000 crore.

“The decline in bond issuances during the fourth quarter of 2010-11 may be attributed to volatile markets and tight liquidity conditions that kept interest rates at elevated levels,” ICRA said in a research note released this month. “(This has resulted) in entities preferring to raise short-term debt or availing bank borrowings, compared to bond markets,” it said.

Analysts said deficit liquidity for most part of the January-March period resulted in interest rates rising across tenures. The spreads for corporate bonds also widened in the last quarter of the current financial year. The difference in the spreads for AAA rated corporate bonds maturing in three to four years with government bonds of a similar duration increased to 125 basis points by end-March from 97 basis points in December. For AA+ rated bonds, the corresponding spreads increased to 142 basis points in March from 114 basis points in December.

“In 2010, the scenario was different, since there was surplus liquidity. The market appetite too, was better,” said Ajay Manglunia, senior-vice president, Edelweiss Securities.

Banks and non-banking finance companies (NBFCs) were the primary issuers, accounting for around 65 per cent of the total bonds issued in the quarter. “NBFCs are regular borrowers in the corporate bond market. They can afford to raise funds at higher rates, as they re-price it and pass on the cost to their customers,” said a senior official with a public sector bank.

“Certain clients who are issuing bonds in spite of the high interest rates are taking out these issues and hedging against the higher interest rates by swapping back. So, the pain in terms of high interest cost is short term, since one is not locked in for a longer tenure,” said a foreign bank official. “While you are paying a higher rate on the bond, you receive a higher rate on the swap because swap rates are also very high now. So, you are negating the impact. Overall, however, there has been a slowdown in the bond market,” he added.

Analysts and bankers, however, expect issuances to pick up in the coming months, as interest rates are expected to soften owing to improving liquidity conditions. “It will take another two to three months for rates to settle and issuances to pick up,” Manglunia said.

Market participants said the corporate bond market is yet to develop and lacks depth, since only top rated companies dominate the market.