Corp bond issuances rise despite high coupon rates

The steady hike in coupon rates hasn’t quite curbed fundraising by corporates through private placement of bonds.

As per data available with Edelweiss Securities, firms have raised Rs3,839 crore through this route so far in May, compared with Rs6,100 crore in all of April and Rs6,340 crore in March.
Just last Tuesday, Tata Sons raised Rs200 crore by issuing 5-year paper at a coupon rate —- the rate of interest it has to pay to those buying the bonds — of 10.25% per annum, after having raised Rs100 crore on April 19 through issue of 5-year paper at a coupon rate of 9.75% per annum.

The hike in coupon rate follows the 50 basis points (bps) hike in key policy rates by the Reserve Bank of India (RBI) earlier this month.

But firms, particularly banks and non-banking finance companies, aren’t shunning the route just yet.

“There is buying of these bonds, but at higher level of coupon,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

More hikes from the RBI are expected, in a bid to rein in the runaway inflation. The central bank has already hiked key policy rates nine times since March 2010.

“The market is expecting another 25-50 basis points hike in key policy rates by RBI going forward this year,” said Arvind Konar, head fixed income, Almondz Global Securities.

This could mean a further hike in the coupon rates going forward.

“The coupon rates are expected to go up further and the rise may be in the range of 25-50 basis points by June,” said an issue arranger who did not wish to be named.

The next mid-quarter review of the RBI monetary policy is expected on June 16.

Still, few see firms frontloading their borrowing programmes, or borrowing more now than later.

“Firms will not go for frontloading of their borrowing plans because of tight liquidity,” said  Manglunia.

The rising cost of borrowing is seen impacting the firms going forward.

“We believe that banks and NBFCs may find it difficult to pass on the full increase in their borrowing costs to their borrowers. This will lead to a decline in their net interest margins,” said Pawan Agrawal, director, Crisil Ratings.

Firms with good credentials would have an edge, though, in that they can tap the international market more for their fundraising plans due to cheaper rates, said an issue arranger, requesting  anonymity.