Dearer bonds a boon for bank loan market
Bank loans are becoming attractive for companies that had shifted to the bond market. Banks recently lowered their interest rates and are expected to hold on to current levels for some time, considering not all the monetary easing has been passed on to customers. But bond yields have started rising in anticipation of a rate-hike scenario.
Banks are clear that lending rates are not going to fall further. Even then, hiking rates is not possible for them if the Reserve Bank of India (RBI) continues to stay put. Besides, there is a real possibility the central bank could pare policy rates by another 25 basis points even after it shifted its monetary stance to ‘neutral’ from ‘accommodative’.
“A large part of the lending rate cut has already happened,” said Chanda Kochhar, managing director and chief executive officer of ICICI Bank, in an interview. “An immediate rate cut is unlikely,” she said, adding it would depend on what the RBI did next and how much of the current and savings account deposits mobilised after demonetisation remained in the banking system.
But bond yields have started inching up and issuers are becoming cautious. "The bond issuances we see today are largely to refinance existing obligations. I see this trend continuing for some time as bonds are more competitive for refinancing. But institutional credit will continue to be the preferred route when it comes to financing the construction or pre-commissioning phase of the infrastructure sector,” said R Shankar Raman, group chief financial officer, Larsen & Toubro.
For now, the corporate bond market has kept up its steady rise. In the six months to February, total corporate bond issuance was ~2.67 lakh crore. In the comparable period a year ago, the total issuance was ~1.85 lakh crore.
Lower rated companies have flocked to the bond market. Of late, even these companies have lowered their offerings, according to traders. “The corporate bond market is dominated by Public Sector Undertaking (PSU) and Non-Banking Financial Company (NBFC) issuance. As manufacturing corporates get better rates from their bankers they are not regular issuers. In a rising interest rate scenario, investor prefer short-term duration bonds,” said Alpana Dave, head of institutional sales, Crest Debt Capital Market, a corporate bond arranger.
Many bond offerings are in the 1.5 to twoyear range, where rates have risen by 15-20 basis points (bps) since February 8. However, yields in the 10-year segment have risen about 50 bps, commensurate with the movement in gilt yields. Arated bonds, two notches below the top, can expect to raise money at 10-11 per cent. Banks charge the same company close to 12 per cent for a loan. The difference could narrow quite sharply if yields inch up and banks keep the rates steady. For an AAA-rated company, 10-year bonds are available around 7.85 per cent.
Even as longer tenure bond issuances are slowing, there is a ready market for these as pension funds and insurance companies are big buyers in this segment.
But, these investors are restricted by their mandate to invest in only highly rated paper. For other issuers, longer term paper is not an option, according to dealers.