FCCBs catch players' fancy

OUTLOOK/Corporate Bonds

Though it was believed that more and more corporates will tap the primary markets to raise funds, the scenario looks different.

In fact, overseas markets continue to remain the favourite route for long-term borrowings for corporates.

While a rapidly growing company aiming at wider investor base is opting for foreign currency convertible bonds (FCCBs), public sector corporates which have no option for diluting equity base have sought refuge to external commercial borrowings (ECBs).

According to bankers, FCCBs have become the flavour of the market due to the ongoing stock market boom.

This is because the strike price for the in-built equity conversion will be pegged to the ruling stock market.

Moreover, as the instrument has an equity conversion built into it, the coupon on the bonds works out much cheaper than ECBs.

The 10-year paper is expected to hover in the range of 5.30-40 per cent this week. This has led to an absolute lull in the bonds market. Part of the dullness is also attributed to the demand for loans as compared to bonds.

Loans are being favoured as the spread between the prime lending rate (PLR) and the rate charged by a bank is gradually narrowing down with the RBI insisting on transparency in banks' PLR.

The spread between a triple A corporate bond and the underlying five-year gilt has gone up to 85-90 bp as against 60-70 bp a month back.

However, trading in the secondary bonds market is active as most of the players including banks and mutual funds want to remain invested in corporate bonds for a better yield differential.

Short-term CPs come into focus
The commercial paper market will remain lacklustre this week.

Short-term capital requirement is being met by working capital demand loans and the interest rate on these instruments is being pegged to commercial papers.

The secondary market remains active as investors, on lack of long-term interest rate outlook, are investing in CPs for gaining good yield differential in the short-term.

Moreover, with the year-end coming closer, banks and mutual funds prefer to remain invested in short-term commercial instruments.