Companies raising funds through corporate bonds may have to pay higher cost of funds. Reason: low investor appetite but more than adequate supply of bonds. Consequently, prices of those securities remain low even though sovereign papers are available at a higher price. Bond prices fall when yields rise and vise-a-versa.
“Excess supply is coming at a time of lower demand. This is crux of the matter for the entire phenomena. The failure of tax-free public bond issues has forced companies to mop up funds through private placement route in the corporate bond market. However, those issues are not offering attractive rates,” a senior vice president (bond market) from a brokerage associated with a bank told moneycontrol.com.
In its budget 2012-13 the government had allowed some select state-owned companies to raise Rs 55,000 crore through tax free bonds. Most of those issues failed to garner encouraging investor response due to lower rate of interest. Consequently, they are knocking the door of corporate bond market to meet their fund requirements.
For example, Rural Electrification Corp (REC), which had closed its issue in December, 2012 collected about Rs 3,000 crore only against the target of Rs 5,500 crore, including the oversubscription option.
In respect of the budgetary allotment, the government had earlier mandated certain norms for offering interest rate. Those are: for public issue wherein investment is limited upto Rs 10 lakh 50 basis points lower than the 10-year government yield recorded 30 days prior to the issue date. For private placement, it has to be 100 bps lower than the g-sec yield recorded a week back from the date of issue.
Over the last two months the 10-year benchmark bond yield dropped from 8.15% to the current level of around 7.80%. However, bond yields remain static in corporate bonds in the range of 8.50-8.80% for different maturities.
In the private placement space, all taxable issues are offering lower interest rates compared to banks’ current rate of borrowings.
“Banks are reluctant to subscribe those issues. Most of the lenders are currently borrowing at about 9% from the certificate of deposit (CD) market. Naturally, they will not invest in any paper, which is offering below 9%. The only way is to offer higher rate of interest,” said a senior official from a brokerage firm that is one of the arrangers of those issues.
In the last few weeks, REC came out with a 5-year paper (private placement) offering 8.70%. Power Finance Corporation offered 8.72% for similar like paper. Again, they are going for a private offering but for a 7-year paper offering 8.82-8.86%. On an average the ticket size of those issue ranges between Rs 100 crore and 200 crore.
The lackluster response too added to arrangers’ woes. Currently, they earn 10 paisa commission for 10 year paper to underwrite an issue. This means, an arranger who is building Rs 50 crore issue, would get a commission of Rs 5 lakh. Moreover, if the issue is not fully subscribed, the arranger has to take it all of its own.
“It is fancy for us to participate in those issues, even at the cost of a loss. Every investment banker wants to be in the prime ranking list. This helps in getting more business,” an investment banker quipped.
In fact, the trading volumes in secondary corporate bond market too have fallen. Last week, the average trading volume in corporate bond market was at around Rs 3,100 crore as against Rs 3,600 crore in the preceding week.