Uncertainty may keep bond issues low

Corporate bond issuance are expected to fall to Rs 3,500-4,500 crore in October, almost half of the Rs 9,200 crore issued thus far this month, due to uncertainty over the direction of domestic interest rates after the US rate cut of 50 basis points, merchant bankers said.

Even as RBI is expected to maintain status quo on rates at the mid-term policy review on October 30, most issuers may wait until clarity on interest rates emerges.

"Issuances may not be high as people may wait for the markets to stabilise," said Srinivas Raghavan, head of fund management at IDBI Gilts.

Dealers said , manufacturing companies that were expected to raise funds through local debt markets after the tightening of overseas borrowing norms might now opt for bank credit.

"I think the loan market is right now more hot than bonds. Companies could look to borrow through the loan market more," said the primary dealer. Since August, companies are not allowed to utilise overseas loans of above $20 million for domestic expenditure. Loans up to $20 million can be used for rupee expenditure only with the prior approval of RBI.

This month, issuances rose because most public sector companies raised funds through domestic debt after the tightening of overseas borrowing norms.

Power Finance Corporation raised close to Rs 1,600 crore from the local debt market after RBI rejected the company's proposal to raise an overseas loan of $200 million.

But their private sector counterparts may not necessarily follow. "Manufacturing companies are looking at the debt market, but most issues will likely be from finance companies. Moreover, even the arrangers are a bit sceptical about private sector bonds," said Raghavan.

So far manufacturing companies that have shown interest in issuing bonds have a rating below AAA or AA+, bankers said. It is easier to get investors for AAA rated bonds rather than A or BB+ bond, Raghavan said.

On the other hand, financial institutions such as Infrastructure Development Finance Co, Housing Development Finance Corp, and CitiCorp Maruti Finance have been regular issuers in the corporate private placement market, merchant bankers said.

Bonds of such companies are AAA or AA+ rated. Issuances from such companies could rise as credit offtake typically gains strength in the October-March period of a financial year.

A factor that could drive volumes and investors' interest in primary corporate bond issuances will be liquidity, which is expected to be comfortable following RBI's dollar purchases, merchant bankers said.

Despite the advance tax outflows, interbank cash supply is adequate and banks invested around Rs 3,500-4,000 crore at reverse repo tenders daily.

"After the advance tax outflows, everybody was bracing for a grim picture. But we have seen that after tax outflows, there is not much tightness," said Raghavan. Going forward, outlook on interest rates and liquidity will influence corporate bond issuance.

"Everything would depend upon liquidity in the coming months. Though cash is expected to be comfortable broadly, investors will put in money only if they are sure on liquidity," said a merchant banker in New Delhi.