Private placement of debt takes a hit

The amount raised through private placement of corporate bonds in the last two months has fallen 32% year on year, suggesting the liquidity crisis is hurting demand for the bonds.

Mobilisations through this route in January and February amounted to Rs33,175.6 crore, Securities and Exchange Board of India data show.

Firms are instead meeting their year-end fund requirements by selling short-term papers.

“Due to liquidity tightness, short-term rates have gone up. The investor is finding short-term rates more attractive compared with medium-term and long-term rates. Even insurance companies, which typically go for long-term papers, are parking their money in short-term papers as rates are attractive,” said Ramesh Kumar, senior vice-president (debt markets), Asit C Mehta Investment Intermediates.

Coupon rates on 10-year corporate bonds are in the range of 9.10-9.25%.

On the other hand, one-year certificate of deposit (CD) and commercial paper (CP) rates are at 9.85% and 10.2%, respectively. CD rates in the three-month and six-month segments are at 9.75% and 9.85%, while CP rates in the three-month and six-month buckets are at 10.55% and 10.5%, respectively.

CD rates have cooled down a tad, but CP rates continue to be high amid tight liquidity.

On Tuesday and Wednesday, net borrowings by banks under the Reserve Bank of India’s daily liquidity adjustment facility were over Rs1 lakh crore.

As firms have resorted to this kind of borrowings — paying higher rates for shorter tenure papers — the interest costs are rising.
Kumar said the companies will eventually pass on this high interest cost to their customers.

A senior official of a reputed non-banking financial company, who wished not to be quoted, agreed that firms will pass on the high interest cost to customers because CP rates have been at elevated levels for quite some time.

According to traders, March is also seeing very few private placements of corporate bonds.

The situation is seen improving only in April when liquidity eases and investors’ appetite improves. “From April, liquidity is likely to improve and the interest rate scenario is likely to take some direction. At that time, short-term rates will fall and investors will start taking interest in medium-term and long-term bonds,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.