Debt funding at 5-yr high as equities dry up

With no investor appetite for stocks, firms have little option despite high interest rates

For India Inc, as fund raising through the equity markets hit a rough spot in 2011-12 due to volatile secondary market conditions, debt funding soared to five-year highs. In fact, the percentage of debt raised from the market was higher than in 2008-09 (post-Lehman crisis).

Of every Rs 100 mobilised from the financial markets, Rs 88 was raised through debt instruments. Simply put, of the total Rs 5.90 lakh crore mobilisation from the financial markets, debt accounted for 88 per cent or Rs 5.19 lakh crore.

V Ashok, chief finance officer, Essar Group, said, “Indian companies have only two options — equities or debt. The bond market has no depth and hence, is confined to top-rated companies. As equities were not doing well during the year, companies had to resort to debt.”

High debt levels and high interest rates were hurting profits of India Inc. But, “they opted for a trade-off between growth and profit and preferred to stay afloat by taking debt, as there is hope that interest rates will moderate in the months to come and costs will come down”, he added.

Equity issuances in the capital market remained low, with mobilisation through initial public offers remaining at its lowest since 2008-09. The follow-on public offer from Power Grid Corporation and offer for sale from ONGC brought some respite.

Saurabh Mukherjea, head, institutional equities, Ambit Capital, said, “Investors had virtually no appetite for equities, as apart from global factors, India had its own issues, like lower growth and political issues. With bank loans also getting costlier, companies had to resort to other debt. And, 2012-13 does not look meaningfully differ. Reliance on debt is likely to continue.”

Mobilisation through preferential offers to non-promoters was affected marginally but there was a significant drop in fund raising through qualified institutional buyers (QIBs), on account of poor returns from past issues. Capital market offerings abroad also came to a halt on account of poor returns from foreign currency convertible bonds.

Saurabh said, “Balance sheets of companies in sectors like infrastructure, power, real estate and construction were also not good and for companies in general, debt-to-equity ratio was also worsening. Investors are staying clear of high debt companies.”

Commercial banks faced a cash crunch as a result of their resources being used for financing 3G spectrum auctions and on account of increase in the cash reserve ratio. As a result, the corporate sector raised working capital funds through commercial paper (CP). The share of CP in the total funds raised thus shot to a high of 48 per cent.

WEIGHED DOWN BY DEBT
	‘07-’08	’08-’09	‘09-’10	‘10-’11	‘11-’12*
Preferential	24,290	40,471	15,294	29,007	22640.94
QIBs	25,770	189	43,968	24,674	1,438
Overseas	74,122	1,412	45,299	48,723	17,770
CPs	37,260	51,666	98,673	181,639	280,942
Debt	129,717	178,262	191,866	194,998	202,825
Rights	32,519	12,622	8,321	9,594	5,952
Debt offers	1,000	1,500	2,500	9,431	35,992
IPO + FPO	52,219	2,034	46,941	46,182	22,890
Total	376,897	288,156	452,862	544,248	590,450
Debt	167,977	231,428	293,039	386,068	519,759
Debt share (%)	44.57	80.31	64.71	70.94	88.03
Source: NSE and Prime database; All figures in Rs  crore (except when specified otherwise)                   *Up to February

Ashok does not perceive CP as a healthy instrument due to the high rates and the need to roll these over every six months.