Firms slow on long-term bonds amid Covid worry

Indian companies are holding back plans to raise longer-term bonds, and will likely rely on short-term ones if the pandemic continues longer.

Bond arrangers say even public sector units (PSUS) have decided to go slow on long-term issuances.

They will most likely focus on short-term bonds for their working capital needs and push their longerterm bond plans for the latter half of the financial year.

Chennai Petroleum Corporation (CPCL) withdrew its issuance last week because rates were higher than expected. Bond arrangers say others will follow suit. Some PSUS have advised the arrangers to go slow on fundraising, though none has asked for scrapping it. However, if there are not enough bids, the issuances could be cancelled, some have advised.

“The rates asked were not an indication that the markets have a negative view on the company. Rather, it is more that the markets are dull,” said a senior bond arranger.

A CFO of a mid-sized firm said lack of basic needs such as oxygen in hospitals and rocketing death rates had soured the mood of investors and issuers.

“Unless the government gets a grip on the situation, what would the funds raised by the private sector be used for? Rates will remain soft for at least one more year. Capacity utilisation has nosedived to about 60 per cent, and it will come down even more if this situation continues,” said the executive.

Besides, there are other reasons for this. While the system is awash with liquidity, there are expectations that rates will soften considerably because the Reserve Bank of India (RBI) would most probably reintroduce some of liquidityeasing measures of last year. For example, it may stop doing the ~2 trillion reverse repo auction and let the banking system continue with the excess liquidity.

The central bank is restoring the cash reserve ratio (CRR) in two phases by May 22. The CRR is now at 3.5 per cent. If the pandemic continues, the RBI can let it be at this level or even roll it back to 3 per cent. The RBI may ease restrictions on long-term repo operations (LTROS), which are used in various formats to infuse liquidity.

While the RBI has announced a G-sec Acquisition Programme (GSAP) of ~1 trillion in the April-june quarter, it can announce an even bigger amount or even bring in outright open market operations (OMO) to bring down yields.

“Corporates may not raise as much through bond issuances this year as last year we had LTRO, TLTRO (Targeted LTRO), TLTRO 2, etc. This year, while we do have a version of the TLTRO, it is not as popular now. Companies will assess their expansion plans and need for resources,” said Joydeep Sen, consultant fixed income, Phillip Capital.

The underlying fear for the market now is that the government may have to revise upwards its borrowing again as the severity of the current pandemic has been particularly disrupting with no end in sight. Economists have started revising their growth forecasts and even monetary policy members red-flagged the infections having a devastating impact on growth.

“Rapidly rising cases are the singlebiggest challenge to ongoing recovery in the Indian economy,” said RBI Governor Shaktikanta Das in the minutes.

The rise in infections could delay normalisation by a quarter or two, warned the RBI’S executive director, Mridul K Saggar.

Debendra Dash, senior vice-president of AU SFB, said the market had enough liquidity, but any guidance by the RBI on low rates for a longer period would trigger a rally in dated bonds.

“The RBI may do an Operation Twist, along with current OMOS, to support the yield. Assurance of durable liquidity and guidance of an accommodative stance for a longer period of time will be the key in bringing down the yield,” Dash said.

Pumping in more liquidity may not have the desired impact, particularly on medium to long maturities, according to Sen.

“The RBI has been doing OMOS, GSAP, twist OMO etc. for the medium to long end, and is expected to continue doing so. In other words, absorb part of the incremental government bond supply. OMO on SDLS (state development loans) may come back this year,” Sen said.