Corporate bond market starts warming up to NBFCs easing liquidity concerns

India’s top-rated private and government-owned companies may be enjoying historic low rates in markets for their short-term money, but the situation has not improved much for lower rated firms, particularly from the financial sector. However, sporadic issuances of bonds have started. 

Admittedly, the liquidity scare faced by the non-bank financial companies (NBFC) have eased somewhat, but even there, well rated companies are the beneficiaries, who have started issuing debt papers in larger numbers.  

Financial companies are also lining up equity issuances, and some dollar bond issuances are planned as well. In domestic markets, gold loan companies are also getting active in raising bonds.  

“The bond market has slowly started accepting NBFCs back. The para banking sector has also started getting healthy loan support from banks. The NBFC crisis could be nearing an end,” said a senior banker, requesting anonymity.  

The foreign branches of Indian banks have lined up heavy issuances of certificates of deposits (CD) in offshore markets. State Bank of India (SBI) and Bank of India (BoI), through their various foreign branches, have lined up CD issuances taking advantage of the low rates overseas. However, while banks cannot bring that money onshore, they will have to use it for their own local needs.  

The NBFCs have benefitted from various liquidity and guarantee measures taken by the Reserve Bank of India (RBI) and the government. But the buyers are still leaning towards AA and above papers, even as some A rated companies, both from financial and non-financial sectors have stepped up issuances. The risk aversion is still visible in the markets, but there is a perceived assurance that the worst could be over for the NBFC sector, unless the global economy and as an extension, the Indian economy, head towards choppy waters due to the worsening of the Covid-19 crisis.  

“The abundant liquidity and risk aversion in the banking system is now driving down yields on short term commercial paper of top-rated corporates to historic lows, as banks explore yield pickup alternatives to parking money with RBI through the reverse repo window,” said Nachiket Naik, head of corporate lending at Arka Fincap. 

State owned NTPC, last Friday, raised three months' money at 3.34 per cent, a record low. ICICI Securities Ltd, on the same day raised similar maturity papers at 4.05 per cent. ICICI Securities Primary Dealership had on September 2019 raised one-month commercial papers at 5.75 per cent. Chennai Petroleum Corporation Ltd (CPCL) on 18 June had raised 2.5 months' money at 3.39 per cent. The same CPCL had raised one-month money at 5.40 per cent in September 2019.  

In the secondary market, HDFC commercial papers are trading at 3.5-4.5 per cent depending upon the maturity. Hero Fin Corp papers maturing on 30 Oct was at 5.10 per cent. L&T’s papers maturing in December is trading at 3.75 per cent, but L&T Infra is trading at 5.30 per cent. NTPC and IOC papers, in the same market, is trading at 3.15 and 3.20 per cent respectively. 

The corporate bond market, though, has started buzzing with activity. There were a number of good issuances last week. HDFC, AAA rated, raised 10 year bonds worth Rs 4,000 crore at 7.25 per cent. JM Financial Credit Solutions (AA) raised three-year bonds worth Rs at 9.1 per cent. Muthoot Home Finance, having the same rating, raised three year money at 8.5 per cent, Chola (AA+) raised two year money at 7.2 per cent, Fedbank Financial (AA-) raised three-year money at 9 per cent, Tata Housing (AA) raised 1.5 year money at 8.75 per cent, Aavas Financiers (A+) raised 1.5 years money at 6.6 per cent, Esskay Fincorp (A) raised money 3 year money at 11 per cent. 

This shows that investors are no longer going by rating alone, as companies in the same rating bracket are paying differential rates on their bonds. This also shows that investors, mostly banks, are more than willing to buy commercial papers for less coupons, instead of taking duration risk on corporate bonds. 

However, "the current moratorium on loan portfolios and perceived asset quality challenges of BFSI players, has resulted in higher yields for non-industrial house backed NBFCs & HFCs,” Naik said.