Over 98% of corporate bond issuances are private placements: Report

Even as regulators push to deepen corporate bond market by increasing liquidity in secondary market, efforts are getting nullified by the near-total dominance (98.5 per cent) of private placements, which can't be traded in secondary market, shows a report.

Sustained market making efforts by the regulators have seen the outstanding bonds rising by almost four-fold to Rs 39.6 lakh crore in FY22 from Rs 10.5 lakh crore in FY12, according to an analysis by Bank of Baroda's economists. Between FY21 and FY22, outstanding corporate bonds increased by 11.2 per cent.

As against this, the government bond outstanding is Rs 84.71 lakh crore and total volume, including the secondary market trading, was Rs 126.6 lakh crore in FY22.

 

As much as 98 per cent of the new issuances of corporate bonds are carried out in the private placement route in FY22, with just 2 per cent of the Rs 6 lakh crore issuances being public issues in FY22. Public issuances of bonds inched further to 1.5 per cent so far this fiscal, Bank of Baroda economist Aditi Gupta said in a note.

Fresh corporate bond issuances have seen a steady rise in the past decade. From just about Rs 3 lakh crore in FY12 to Rs 7.8 lakh crore in FY21. It moderated to Rs 6 lakh crore in FY22. In FY22, corporate bond yields rose in line with G-Sec yields amidst a higher than expected borrowing programme by the government, elevated oil prices and rising global yields.

This could partly have come in the way of issuances as unlike bank loans where interest cost varies with the monetary regime, cost of capital gets locked in at the issuance rate for bonds. As a result, bond issuance was also lower in FY22. Till July this fiscal, corporate bond issuances have increased by 14.1 per cent on-year, Gupta said.

What is more interesting is that there has been no change in the trend of private placements vastly dominating new issuances in the past 10 years. While private placement accounted for 88 per cent of the total issuance in FY12, the same rose to 98 per cent in FY22, and further to 98.5 per cent so far this fiscal, she said.

According to her, the major reason for this is that companies do not wish to undertake the cumbersome processes involved in case of public issues, while private placements provide a number of advantages to issuers, including lower costs, quicker turnaround time and better price discovery.

While corporate bonds outstanding rose from Rs 10.5 lakh crore in FY12 to Rs 39.6 lakh crore in FY22, outstanding bank credit remained higher, though incremental growth has been sluggish -- from Rs 29.6 lakh crore in FY12 to Rs 61.7 lakh crore in FY22 -- around two-fold increase.

Another feature of the corporate bond market is the dominance of financial services companies in this space, accounting for more than 70 per cent of issuances. Within this, banks, mutual funds and asset financing firms are the major players.

The services sector leads the non-financial segment averaging at 10 per cent between FY12 and FY22, followed by the manufacturing sector averaged 5.6 per cent during this period.

Though there has been considerable progress in the development of the corporate bonds market, trading in this market has been highly limited compared to the G-Sec market. The turnover in G-Sec market was Rs 126.6 lakh crore in FY22 or about seven-times of the trading in corporate bonds.

Another problem for the low trading volume or lack of liquidity in the secondary market is due to the fact that the market is heavily skewed towards higher rated papers.

According to RBI data, as much as 80 per cent of issuances in FY22 were AAA-rated, and 15 per cent were AA-rated, leaving just 5 per cent for high-yielding junk papers.