Rock-bottom rates fuel corporate bond bonanza but asymmetry remains

At Rs 8.27 trillion, borrowing at record high this year

Buoyed by the abundance of liquidity and rock-bottom rates, corporate bond issuance so far this year — at Rs 8.27 trillion — has been the highest on record. However, there is a huge asymmetry when it comes to top-rated firms tapping the market and low-rated ones trying to raise money. 

In the monetary policy on December 4, Reserve Bank of India (RBI) governor said there has been considerable easing in financing conditions, and that will prepare the ground for “strengthening the nascent signs of recovery that have become visible in the second half of 2020-21.” 

It is true that the central bank prevented a market meltdown after the ILFS and DHFL crisis. It’s massive liquidity support to the financial system ensured that the spread of AAA-rated three-year corporate bond yields over G-Sec yields of corresponding maturity fell from 60 basis points (bps) on October 8 to 17 bps.  

The governor went on, saying that the spreads on low-rated corporate bonds have also moderated significantly during the same period: By 34 bps each for AA-rated three-year bonds and BBB- (BBB minus)-rated three-year bonds.  

“Corporate bond spreads have, in fact, narrowed to pre-pandemic levels across the term structure,” the governor said. 

That could have been the case for a few, but low-rated firms, especially non-banking financial companies (NBFCs), that do not necessarily see their fortunes changing much. 

“The situation has eased marginally for low-rated NBFCs. They are still struggling for funding and not getting it,” said Raman Aggarwal, chair of NBFCs, Council for International Economic Understanding (CIEU). 

According to Joydeep Sen, fixed-income consultant at Philips Capital, after the spate of corporate defaults starting with IL&FS in September 2018 all the way to Altico and DHFL, banks suffering bad debt issues and government banks being recapitalised, there is risk aversion among investors, which is understandable.

RBI tried to chip in, doing targeted long-term repo operations worth trillions of rupees to ease the funding conditions for low-rated firms.  

Still, “funding will always remain an issue for low-rated entities. The median rating of the universe of rating agencies is BBB or lower, which are hardly investment grade. These entities cannot issue bonds as there would not be any taker. So, bank funding is the only option,” said Sen.  

Indian firms, mostly NBFCs and public sector units, raised Rs 8.27 trillion up to Tuesday. In 2019, they had raised Rs 7.46 trillion, and in 2018, the total corporate bonds raised touched Rs 5.88 trillion. There is an additional Rs 3.89 trillion of commercial bonds outstanding that the corporates have raised to manage their finances at an interest rate of as low as 3.09 per cent. The policy repo rate, in comparison, is 4 per cent.  

But most of the funds mobilised is not for a long period. Despite the ratings and liquidity, both the borrower and the lender are not eager to take exposures of more than three to five years.  

“The market accessibility and rock-bottom rates are skewed, which is not unusual. However, availability of slightly long-term funding at ease and at a cheap rate is yet to be seen,” said Soumyajit Niyogi, associate director at India Ratings and Research.  

The huge fund mobilisation has happened despite India remaining under full or partial lockdown for the better part of the year. Part of the reason why the bond market saw so much activity could be because banks have become reluctant to lend. But banks, of late, have started competing with each other to offer bulk rates of below 6 per cent to corporates. This is unsustainable, State Bank of India’s research department pointed out recently.  

“The precipitous fall in short-term rates, which is below RBI’s policy corridor, is in sync with the crisis condition. Now, if the economy is out of crisis, the rate should realign to normalcy. Real economy and real rate can’t stay in opposite regimes for long. Only comfort is muted credit growth, far below from overheating, but that doesn’t ensure no mispricing in the asset-liabilities market,” said Niyogi.