By Anouchka Trivedi
MUMBAI, September 23 (Reuters) – India’s top-rated companies are raising money in the debt markets at rates barely above government rates, as investors rush to buy high-quality bonds amid low supply.
The spread between 5-year ‘AAA’ rated corporate bonds INAAAPSU5Y=IMMU and government bonds IN5YT=RR has shrunk from 17 basis points to 25 basis points since January, while the spread between the two 3-year stocks INAAAPSU3Y=IMMU, IN3YT=RR halved over the same period.
Typically, companies have to pay higher rates to compensate for the perceived higher risk, but top-rated companies currently pay nearly 7.50% for three-year funds and 7.55% for five-year debt. year.
“We are seeing this because we are concerned whether the supply is there or not,” said a trader at a major state-owned bank.
In the second half of last year, banks, pension funds and insurance companies waited for corporate bond supply, which failed to materialize, the trader added, requesting anonymity.
Even as the economy recovered, corporate bond issuance fell by more than a fifth between April and August this year compared to the same period before the pandemic, in 2019.
This has allowed top-rated companies to raise funds at rates close to borrowing rates on government debt, the safest asset in the Indian market.
For example, the infrastructure finance company REC Ltd RECM.NS on Wednesday set the annual coupon on bonds maturing in three years and five months at 7.32%.
The yield on three-year government bonds was 7.17% during this period on a semi-annual basis, which, if annualized, is about the same level.
Much of the benefit of lower rates is limited to “AAA” rated companies.
“Corporate bonds rated ‘AA’ or ‘A’ never benefited from excess liquidity during COVID because people didn’t want to take risks,” said Ajay Manglunia, managing director of JM Financial. .
“It’s only when government bond yields relative to ‘AAA’ bonds normalize that people have a better appetite for the lower-rated segments.”
SPREADS CAN GO UP
Spreads could widen from now on, analysts say.
India’s excess liquidity had eased in September and turned into deficit this week for the first time in more than three years, sending a signal that the era of cheap money may be over.
This, in turn, could induce more companies to borrow early in the period.
“In a rising rate environment, everyone would like to freeze their costs rather than keep them uncertain,” Manglunia said.
The likes of State Bank of India SBI.NSHERE ICBK.NS and Bank of Baroda BOB.NS have tapped the market over the past month and are expected to need more funding to cushion their capital position.
“As banks move in search of liquidity in the markets, they will pay the price, and that will be passed on to borrowers,” said Anand Nevatia, fund manager at Trust Mutual Fund.
Additionally, as private investment picks up, companies in sectors such as power, industrials and consumer goods are likely to seek funding for capital investments, investors said.
Spread between 5-year corporate bonds and government bonds compressing Spread between 5-year corporate bonds and government bonds compressing
Spread between 3-year corporate bonds and compressed government bondshttps://tmsnrt.rs/3C3tAhn
(Reporting by Anushka Trivedi and Aftab Ahmed; Editing by Savio D’Souza)
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