Public issue of bonds see tepid demand due to rising yields

Expectation of bond street is now for a maximum rate cut of 50 bps in current fiscal

Investors aren’t being attracted to public issues of bonds due to hardening of yields. Recently, the outlook for the bond market turned negative, owing to concern on rising global crude oil prices and stress on the monsoon front. It is expected the central bank will cut the policy rate by 50 basis points this financial year (two cuts of 25 bps each); of these, one is possible in the next monetary policy review (June), while the next could be announced in the quarter ending March.

Last month, Srei Equipment Finance’s public issue of bonds was oversubscribed on the base issue. While the base issue was for Rs 250 crore, there was a greenshoe option (a clause in the underwriting agreement that allows underwriters to buy additional shares at the offering price) of an additional Rs 250 crore. The company received bids of Rs 412.87 crore, after keeping the issue open for the subscription period of April 9-30. The retail portion was subscribed 1.19 times.

The non-convertible debentures offered by Srei had tenures ranging from 36 months to 84 months, with various interest payout options such as monthly, annually and on a cumulative basis. The coupon rate for 36 and 39 months was 10.20 per cent a year, while for 60 and 84 months, it was 10.25 per cent a year on an annual payout basis.

“After the pricing of bonds issued by Srei, there was the Reserve Bank of India (RBI)’s monetary policy review. Investors were hoping RBI would be dovish, with expectations of the rally in bonds continuing. Besides, there were a lot of equity issuances, due to which investors kept aside money for those. Investors gained more in equity issues than bonds. That hit the appetite,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

Edelweiss Financial Services and Srei Capital Markets were the book running lead managers for Srei’s issue. Manglunia said Srei’s issue had received a good response, though it could have been better. He added in the current market environment, if issuers opted for smaller tranches in public issues rather a large one, these could see better subscription.

The met department has said this year, the southwest monsoon is likely to be below normal. Also, global crude prices have risen from a low of $45.25 a barrel on January 26 to $66.29 a barrel. The yield on the 10-year benchmark bond, 7.74 per cent at the beginning of April, closed at 7.85 on Tuesday.

“There will be demand for public issue of debt but the pricing has to be according to market expectations. If companies are planning to come and raise money through public issue of bonds at this point, they will have to offer higher returns because of the uncertainties surrounding the bond market. Companies might decide to wait, as there might be more rate cuts,” said K P Jeewan, head of fixed income, Karvy Stock Broking.

Data from the Securities and Exchange Board of India show in the last financial year, public issues of corporate bonds saw a year-on-year drop of 77 per cent at Rs 9,742.83 crore, in the absence of tax-free bonds. This financial year, the scenario is expected to be better, as tax-free bonds worth Rs 30,000 crore are being planned by the National Highways Authority of India and the Indian Railway Finance Corporation.