Fund raising via bonds turn cheaper on hopes of a rate cut

Costs have dropped by 10-15 bps post RBI policy review

The cost of raising funds through private placement of corporate bonds has dropped by 10-15 basis points (bps) in the week since the Reserve Bank of India (RBI)’s fifth bi-monthly monetary policy review.

Issue arrangers believe it could fall further in the January-March quarter, due to expectations of a rate cut by RBI. They say in the 10-year maturity tenure, the highest rated companies are now able to raise funds at 8.48 per cent; it was 8.6 per cent before the RBI review. The decline in costs is in line with the fall in bond yields.

“The 10-year AAA-rated corporate bond yield might drop by another 15-20 bps in the fourth quarter, due to which it will be that much cheaper for corporates to raise bonds. A lot of banks and corporates have lined up bond issuances,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities. AAA is the highest rank given by credit rating agencies, signifying that a company has extremely strong capacity to meet its financial commitments.

In the recent review, the central bank left the repo rate — the rate at which it lends to banks — unchanged at eight per cent. And, revised the Consumer Price Index (CPI)-based inflation target to six per cent by March 2015. It was earlier targeting to bring down retail inflation to six per cent by January 2016.

 

“A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the stance is likely early next year, including outside the policy review cycle,” said RBI governor Raghuram Rajan in the monetary policy statement last week.

IDFC is planning to raise funds later this week. “We are raising three-year paper at 8.43 per cent and 10-year at 8.49 per cent. Put together, we should be able to collect close to Rs 1,000 crore. The issue opens and closes on Thursday. After the RBI policy, bond yields have surely softened but more in G-sec (governments securities) than corporate bonds,” said S J Balesh, senior director, resources, at IDFC.

He said the sentiment had improved and this had a positive impact on corporate bonds, too. “Raising funds through bonds could turn out to be much more cheaper in the fourth quarter,” he said.

Data from the Securities and Exchange Board of India show companies have raised Rs 183,690 crore in the current financial year (starting April 1) till end-October, compared with Rs 166,386 crore in the same period last year.