High interest rates dampen PSU debt issuances in FY11

Rising interest rates prevented many Public sector undertakings (PSUs) from raising debt in the last financial year. Reduced investor appetite for longer tenor papers during the period also contributed to lower debt issuances from the sector.

In 2010-11, PSUs raised Rs 12,450 crore through issuances—44 per cent lower than what they raised in the previous year (Rs 22,205 crore), according to Prime Database.

“Coupon rates for public sector undertakings have increased by more than 100 basis points over a year, and issuers were not willing to borrow at high interest rates for long tenors,” said Ajay Manglunia, senior vice-president, Edelweiss Securities. At their peak, coupon rates stood at around 9.80 per cent for PSUs last year, he said.
 

CORPORATE DEBT ISSUANCES IN 2010-11
Issuer type	Amount (Rs crore)	Per cent  of total issuances	Increase in issuances over last  year (%)
All-India fin inst & banks	116,231	60	7
State financial institutions	1,425	1	7
Public sector undertakings	12,450	6	-44
State level undertakings	1,981	1	-5
Private sector	60,039	31	9
Source: Prime Database

 

Debt issuances from state-level undertakings also declined five per cent to Rs 1,981 crore, compared with Rs 2,085 crore in the previous year. Bond placements from private sector rose nine per cent to Rs 60,039 crore in 2010-11, compared with Rs 55,191 crore in the previous year.

In the last financial year, the interest rates for short-tenor papers (which, like certificates of deposits and commercial papers, mature in a year) rose faster than the interest rates on longer tenor corporate bonds. As a result, investors preferred high yielding short-tenor papers.

Coupons on corporate bonds are determined at a spread over the government security of the corresponding tenor. According to Bloomberg data, one-year spreads for 'AAA' rated corporate bonds touched a peak of 206 basis points, while 10-year spreads rose to 114 basis points in 2010-11. The yields on 10-year government bond advanced by around 20 basis points in the same period.

In 2010-11, corporate debt issuances through private placements rose one per cent to Rs 2 lakh crore from Rs 1.9 lakh crore in the previous year. Financial institutions and banks dominated the corporate bond market, accounting for Rs 1.4 lakh crore, or 71 per cent of the total amount. The power sector ranked second, with a 10 per cent share (Rs 19,025 crore).

The corporate debt market in India has been growing, albeit at a snail's pace. Financial years 2007-08 and 2008-09 witnessed the mobilisation of around Rs 1.2 lakh crore and Rs 1.7 lakh crore, respectively. As a result, it remains underdeveloped and dominated by top-rated issuers.