State of debt market hits primary issuance

REC, PFC retreat after getting ready, tax-free bonds could be hit next unless volatility, tight liquidity ease

Tight liquidity and extreme volatility in the bond market have forced a number of companies to put off fund raising plans.

State-owned Rural Electrification Corporation (REC) and Power Finance Company (PFC), plus some others who were in the market to raise capital had to shelve their plans due to high rates, inadequate liquidity and extreme volatility.

The yields on the 10-year benchmark on Tuesday surged as high as 9.47 per cent, while the cutoff yields on the cash management bill auction by the government rose past 12 per cent. Commercial paper (CP) rates for a tenure between three months to a year have surged to a little over 12 per cent.

Market players said the rates quoted far exceeded the expectations of issuers. This, plus the extreme volatility in recent days, disrupted their fund raising plan.

“When the yield on the 10-year benchmark moves by a wild 50 basis points (bps) in a single day, it becomes extremely difficult for companies to plan and price their offerings. There were a lot of informal enquiries from a lot of companies but the rates were beyond their expectations,” said Ashish Ghiya, managing director, Derivium Capital & Securities.

The yields on the benchmark 10-year bond has shot up by a little more than 100 bps this month, due to the weakening rupee and the liquidity tightening measures taken by the Reserve Bank. Investor appetite for new paper has also taken a beating, worsening the liquidity crunch, as bond prices have consistently been falling.  

“Tighter liquidity and volatility has scared investors. Everyone wants to conserve capital for better opportunity. Investors would start investing once the market stabilises,” said Ajay Manglunia, head of fixed income at Edelweiss Capital.

Market sources said REC, which had filed a prospectus to raise capital in three-year and five-year tenures, for an issue of Rs 150 crore, excluding the overa-llotment option, decided against going ahead. Also, PFC, in the market to issue tax-free bonds through private placement, had to defer the offering.

The next victim of the unstable market conditions could be the tax-free bond issuances. Certain public sector units have been allowed to raise a total of Rs 48,000 crore this financial year through such bonds are are readying for this. The first tranche, by companies including IIFCL and REC, was scheduled to be rolled out in the next few weeks. This schedule could be hit. “Tax-free issuances can only be successful if the market conditions improve over the next few weeks,” said Manglunia.

Some experts say the companies deferring fund raising due to the high rates might have to come to terms with these. “There was also an expectation of a rate cut in July. However, as the rupee has decisively broken 63 (to the dollar), there is a fair chance of a rate hike. Banks have already started raising their base rates. Issuers will also have to align to the elevated rates,” said Ghiya.