India Ratings and Research (Ind-Ra) says that attractive yields encouraged high-rated corporates to borrow directly from bond markets during June-August 2016, bypassing conventional bank financing due to elevated and sticky lending rates. As the issuances of state development loans (SDLs) increase in 2H and states explore funding plans across the yield curve, corporate bonds will be impacted by the trends in and quantum of SDL issuances. Proactive debt management by states will expand investors' options and enhance overall competitiveness, given the top-rated bonds are presently trading at a spread of mere 20bp-30bp over comparable SDLs.
Appetite for Bonds to Hold Up: On the investors' side, banks and mutual funds emerged as the largest investors - while foreign portfolio investors' interest was tepid. Despite the limited room for a fall in rates hereon, appetite for corporate bonds could remain in place because: (1) the Reserve Bank of India's purchase of G-sec through open market operations would free up appetite for other fixed income instruments (2) the falling term structure of rates in a slow growth environment will encourage investors to seek higher yields, nudging them to gradually explore alternatives down the credit curve.
Masala Bonds Offer Funding Diversification: With marquee issuers testing the masala bond market and RBI's recent proposal allowing banks to access this route for Basel III capital, the initial success of masala bonds is likely to encourage other domestic top-rated issuers to explore this route.
Beyond the top issuers, however, the market for masala bonds is unlikely to pick up in a hurry.
Commercial Papers (CPs) Preferred Mode for Working Capital Funding: A faster and smoother transmission of falling rates in market-linked instruments than in loan products catalysed shift to CP market - a trend that is likely to persist in the near term. With the institutionalisation of a predictable liquidity framework, however, money market spreads are unlikely to change in the near term.
Ind-Ra presents its second edition of Indian Corporate Debt Market Tracker - a publication aimed at presenting a complete picture of developments in the domestic primary bond market in terms of sectoral composition, rating mix and commercial paper issuance trends. The study pertains to the June to August 2016 period, unless otherwise specified. The study has been conducted based on the data obtained from Prime Database and pertains to the private placement of corporate bonds. The actual issuance amount may vary.
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