Better rated firms moving to bond mkt, says RBI report

Better rated companies are moving to the bond market, even as bank loans continue to remain an efficient financing tool for lower rated firms, the Reserve Bank of India’s financial stability report said.

Better rated companies can easily tap the bond market, and their borrowing costs are usually nearer the risk-free rate of sovereign treasury bills, rather than banks’ marginal cost of funds-based lending rate (MCLR). And, there is a significant differential, about 185 basis points between risk-free rates and the bank MCLR. One basis point is a hundredth of a percentage point.

If the risk-free rate (govt securities) is 6.57 per cent for five-year money, AAA-rated companies, on an average, raise their fund at 7.39 per cent from the market. The bank MCLR is 8.41 per cent for the tenure.

If a company with A rating has to raise funds from the market, the coupon it has to pay would be 10.2 per cent, according to the RBI. This shows companies below A+ will still be better off borrowing from banks. The differential has expanded the scope for disintermediation of bank financing by corporate bonds in case of quality corporates, the report released on Thursday said.

“Corporates might find it advantageous to place issues with mutual funds rather than accessing bank finance,” said the FSR report, adding such disintermediation trends are consistent across tenors. “To stem the erosion in the quality of credit portfolios, some well-capitalised banks have reportedly started resorting to risk-free benchmark based pricing, as opposed to MCLR-linked pricing.”

The spread differential between equivalent maturity sovereign bonds and highest rated corporate bonds are now around 80 basis points, less than the 100-125 basis points generally observed in the market.

According to the FSR, foreign investors are increasingly keeping their investment position unhedged and the dollar borrowing cost for Indian companies would be benign because of the recent rating upgrade by Moody’s. These together give more reasons for top Indian companies to tap the bond route, rather than rely on bank financing.