Number of new firms tapping commercial paper market on the rise

Commercial paper (CP) issuances have increased significantly since the base rate regime took effect on July 1 and are expected to rise further in the days to come.

CP is an unsecured, short-term debt instrument issued by a company, typically for financing the accounts receivable, inventories and meeting short-term liabilities. Maturities on CPs range from three months to a year and the debt is usually issued at a discount, reflecting prevailing market interest rates.
Interestingly, many of the issuers were not active in the CP market even as recently as the last fiscal since they could get short-term loans from banks below the benchmark prime lending rate (BPLR).

As per data available with Fitch Ratings, 21 of the 102 companies that have tapped the CP market since July 1 are new entrants to the CP market. These include Airports Authority of India, Bharat Petroleum Corporation (BPCL), Blue Star, ICICI Securities, Garden Silk Mills and Srei Infrastructure Finance. Together, these 21 companies have mopped up `1,520 crore from the market between July 1 and September 9, 2010. That’s about 7% of the total CP issuances of `22,295 crore during this period.
Going forward, the proportion of issues by new players is seen rising further.

“The number of CP issuances will go up and the share of new companies tapping this market will also increase. This is because companies will find CP rates more attractive in the time to come,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.
S K Joshi, director (finance), BPCL said, “As a corporate, we will always try to reduce our borrowing cost. Whichever option we will find cheaper, we would go for it. We went for CP in the recent past because it turned out cheaper than bank loans.”

Meanwhile, the business of rating agencies has been growing, too, what with new companies seeking credit ratings before tapping the CP market.

“Earlier, there were a certain number of people who were always tapping this market. Now we are seeing new set of issuers,” said Raman Uberoi, senior director, CRISIL Ratings.

According to Uberoi, a large number of companies had got themselves rated for bank loans in the last two years. Now, these companies know their credit quality and are much more confident to tap the CP market.

Raters see the trend continuing in the days to come.
“The gap between the CP rates and bank loan rate is not that attractive as of now. But, if the banks raise their base rate, the gap between CP rates and bank loan rates will widen and then we would see more companies seeking credit ratings,” said Naresh Takkar, managing director of Delhi-based ICRA.