Prime Corporates Borrowing Cost Plunges 150 Basis Points
The borrowing cost of prime corporates has come crashing down by over 150 basis points in the last one week. This is a direct fall-out of the total freedom given to banks in making lending decisions in the slack season credit policy this year.
Virtually all top-rated corporates like Reliance, Indo-Gulf Fertilisers, Grasim, Tata Iron & Steel Co (Tisco) as well as many multinationals are now looking to place 18-month or 3-year debentures with banks priced in the range of 14.5 - 15.0 per cent. Second-rung firms like Videocon and the BPL group are also in the market for funds.
These moves imply that short-term money for companies has already become cheaper compared to the rates a month ago. There are also indications that funds for longer tenures are also likely to cost less by at least 150-200 basis points.
The commercial paper market has seen the initial burst of deals. Companies like Larsen & Toubro, Pfizer, Thermax and Coates Viyella are using the commercial paper (CP) route to obtain credit from banks at low rates. Coates Viyella has been able to place 90-day CPs at 10.25 per cent against other firms like Pfizer, Thermax, Larsen & Toubro, that have got rates of less than 10 per cent for their three-month paper. This is in sharp contrast with the 12-13 per cent companies were paying on CP issues till a month ago. While no new corporate bond offerings have yet been concluded, indications of a fall in rates are available from the secondary market where prices of corporate bonds have already fallen by over 100 basis points. This is because of a strong demand for corporate paper from banks after debentures were excluded from the 5 per cent cap imposed earlier.
The entire threshold of rates has moved down significantly, said a senior ANZ Grindlays executive. How-ever, another banker said these low rates may be a knee-jerk reaction from bankers after the credit policy. Rates could firm up marginally in the next two weeks, he warned. Bharat Petroleum Corps 3-year debentures, issued a month ago at a 15.5 per cent semi-annual coupon, are now being traded at 14 per cent. Similarly, MTNLs bonds, which were placed at 15 per cent in mid-March are now trading at 14.25 per cent.
Reliance Industries debentures maturing in 1999-2001, which were trading at yields of 17 per cent two months ago, are now trading at 15.25 per cent, while Spic Ltds 18-month paper, which was issued at 17.5 per cent three weeks ago, is now being traded at 16.25 per cent.
Even joint sector companies like Gujarat Alkali have seen their bond yields drop from 17.25 per cent a month ago to around 15.75-16 per cent this week.
Arrangers and syndicators say they have already received informal indications that banks are willing to buy debentures for rates as low as 14.5-15.0 per cent. If the easy money continues, banks may be willing to buy corporate paper at sub-PLR rates, said one syndicator. The easy money conditions are also enticing banks to arbitrage between the inter-bank market and the CP market.
However, bankers point out that the low interest rates are only for prime corporates and multinational start-ups, which have never had any problems repaying past debts. They are less sanguine about lending to companies which may enjoy a high credit rating but are perceived as less than safe by the banks.
On the other hand, companies with less than AA ratings, but belonging to a top-rated group like the Tatas may be able to source cheap funds from banks on the basis of their group pedigree.