An Unbankable Relationship

The low yields are also preventing a secondary market from developing in Indian paper. Lead arrangers point out the paradox. On one hand, it is in the interest of corporates not to let a secondary market develop (if banks could pick up the paper during the latter part of the tenure at higher yields, why would they pick it up in the primary market at lower yields?). On the other hand, it is the very absence of a secondary market that makes placement difficult.

This problem is likely to afflict all sorts of structures specially in the case of public sector units where the finance director rarely has the liberty to reject the lowest bid. For example, the Power Finance Corporation ECB at 62 basis points above LIBOR (it was priced lower than the IDBI borrowing) found the going tough in the international markets. Sometimes, this could end up spoiling the appetite for an entire sector.

Arrangers also point out that while fine rates of interest are definitely a feather in any corporates cap, the rates are sometimes largely indicative of the number of participants which hikes up demanda factor that is to some extent the result of extraneous circumstances and cannot always be relied upon. Once there is enough exposure to India, or when easy liquidity conditions make pre-payments more of a possibility, there wil be very few takers for such structures at such low yieldswhat with even 5 year paper of countries like Thailand and Indonesia ( which are better or at least comparable country risk) offering higher yields.

Perhaps, as more Indian corporates enter the fray with intentions of tapping a wider base for raising monies of different maturities, they would look at step-up structures with a long-term vision. The other option, of course, will be the inevitable market correction that forces a rise in interest rates with a single downturn./BODY>