Lower-rated bond issuances fall, cos eye other options
Informist, Tuesday, Sep 12, 2023
By Subhana Shaikh
MUMBAI – The adage that one man's loss is another man's gain rings true when one looks at the latest developments in India's fledgling corporate bond market.
The issuance of lower-rated corporate bonds on a private placement basis has slowed as companies are increasingly turning to other fundraising options amid tighter liquidity conditions, industry players said.
Financial institutions and companies rated below AA raised 398.45 bln rupees through the private placement of 261 bonds in the first five months of the current financial year, down 36.4% from 626.47 bln rupees through 348 such papers in the same period last year, according to data sourced from the National Securities Depository Ltd and compiled by Informist.
This is at a time when the total fundraising through private placement of corporate bond has risen sharply. Companies have raised 4.40 trln rupees through private placement of corporate bonds, up 42% from 3.09 trln rupees in the same period a year ago.
Funds raised through bond issuances rated below AA as a percentage of total funds raised through corporate bonds declined to 9% in Apr-Aug from 20% in the year-ago period.
The sharp decline in papers rated below AA has come as these companies that used to raise funds through market linked debentures have turned towards the public issue market as the taxation changes in Union Budget for 2023-24 (Apr-Mar) made these instruments unattractive to investors such as high net worth individuals and family offices.
The Budget made income from market-linked debentures to be taxed as short-term capital gains instead of long-term capital gains without indexation.
"Now that MLDs (market linked debentures) are gone out of favour because of taxation, these issuances have totally stopped. MLDs were an alternative opportunity and that has totally gone. They have moved towards public issuances," a senior investment banker said.
In the current financial year so far, companies have raised 62.40 bln rupees through public issue of bonds, up 68.5% from 37.04 bln rupees in the first six months of 2022-23, as per data available on the Securities Exchange Board of India.
"Likes of Navi Finserv, Vivriti Capital and CreditAccess Grameen, which were predominantly raising money through MLDs have moved towards public issuances. Ultimately, retail and HNIs (high net worth individuals) were the major investors in MLDs," the investment banker said.
Apart from public issuances, lower-rated issuers are also increasingly turning towards competitive bank loans on view that the Reserve Bank of India will cut policy rates in the next financial year, market participants said.
"We are in a tight liquidity environment, where bank rates are good, and you can say that credit spreads typically widens more than maybe the increase in the bank lending rates. That also could be one of the reason," said Anil Gupta, the vice-president financial sector rating at ICRA.
The weighted average lending rate on fresh rupee loans by scheduled commercial banks was up 24 basis points on month to 9.44% in July, data released by the Reserve Bank of India showed. While loans are also turning costly as banks continue to raise lending rates, the rise is much more gradual.
Further, lower rated issuers that tapped the debt market with unlisted bonds are also stayong on the sidelines after the Securities and Exchange Board of India in June asked online bond platforms to stop offering unlisted securities on their platform.
"SEBI said that unlisted securities cannot be traded on the online bond platforms. So after that there are not many buyers for such unlisted bonds. So, most unlisted bond issuers are on the sidelines or looking for another fundraising avenues," said Venkatakrishnan Srinivasan, founder of Rockfort Fincap.
Even as such issuances have slowed on a private placement basis, the appetite for lower grade investment credit has increased significantly from high-net worth individuals and family offices.
"Post MLDs, expectation of investors has gone up as they want higher yield since the tax advantage is gone. Now you have to compensate that. Also, after Shapoorji Pallonji's issue, investors want higher rate as they are looking for risk-reward," Srinivasan added.
Investors are in search for high yielding bonds after Shapoorji Pallonji Group company, Goswami Infratech raised 143 bln rupees at a whopping 18.75%.
In the near term, lower rated issuances are likely to tap the public issue market and other alternatives, but in the long-run, the rising demand for such papers may change the course of action for this market, dealers said. End