Moody's: Structured finance transactions to continue strong performance in 2018, despite some weakening in underwriting
India Ratings and Research (Ind-Ra) expects primary market activities in the corporate bond market to remain steady, however, growth will be protracted owing to muted capex plan for Corporate India. On the other hand, short-term money market issuances, especially commercial paper (CP) and certificate of deposit (CD) could gain traction in the foreseeable future.
The data sourced from Prime Database suggests that the primary issuances in the corporate bond market have remained stable at INR1.52 trillion during 2QFY18 versus INR1.64 trillion in 1QFY18. In the similar vein, gross CP issuances clocked INR2.51 trillion in 2QFY18 compared with INR2.64 trillion in 1QFY18.
Proposed Bank Recapitalisation, Rising Bond Yields to Intensify Competition: The agency believes the bank recapitalisation programme, announced in October 2017 could taper credit market share shift to bond market. In addition, the recent surge in bonds yields as against stable bank lending rates will reduce incentives for raising funds through bonds. The competition will be greater for higher rated entities; thus, the primary corporate bond market is likely to report a muted growth.
Mutual Fund Debt AUM Key Driver for Yield Curves: The agency believes a large build-up in debt mutual fund assets under management (AUM) has been a major driver for non-government bond curves in recent time. However, with bottomed out interest rate cycle, stickiness of the funds are major hurdles, particularly in the event of a further rise in the interest rate.
Moreover, the guidelines on mutual fund schemes may necessitate portfolio churning in terms of duration; this will also become an additional driver for shaping corporate bond yield curves. Also, behaviour of foreign portfolio flows, especially large outflows, will be a key determinant for the overall bond yield curve with a substantial build-up in foreign portfolio investment in the domestic corporate debt universe.
Issuances in Money Market Instrument to Gain Traction: Ind-Ra believes, against the stable bond issuances, the issuances in the money market instrument segment may gain traction. The confluence of the Goods and Services Tax and a rise in input cost will push up requirement for short-term funds, especially for entities with lower cash flows. On the other hand, excessive liquidity in the banking system post demonetisation practically exterminated requirement for CDs by commercial banks barring few. The situation has now reversed with average system liquidity reaching close to neutral level. Thus, a rise in CD issuances by commercial banks cannot be ruled out, although the quantum will be susceptible to the overall credit growth in the banking system.
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