Private placement of NCDs up 47 per cent this fiscal

During this period, public sector companies are understood to have contributed to a bulk of the borrowing, bond market experts said.

By Vinayak Aggarwal

Indian firms and banks have increased their borrowing from the non-convertible debentures (NCD) market even as private placement issuances rose 47% between April and August this year, compared to the same period in 2018. Between April and August 2019, corporate bond issuances through private placement stood at Rs 2.49 lakh crore, against Rs 1.69 lakh crore in the same period last year, according to Sebi data.

During this period, public sector companies are understood to have contributed to a bulk of the borrowing, bond market experts said. R Sivakumar, head of fixed income at Axis Mutual Fund, said public sector companies are borrowing to meet funding needs of the government. “As the government has been trying to consolidate fiscally, significant amount of borrowing has been shifted to the public sector entities and we will see that to continue.”

Mahendra Jajoo, head of fixed income at Mirae Asset Mutual Fund, pointed out that public sector organisations like Power Finance Corporation (PFC), Rural Electrification Corporation (REC), Indian Oil (IOC) and Bharat Petroleum (BPCL) were the major fundraisers from the NCD market this fiscal. “Rates were significantly lower this year compared to the last, influenced by lower G-Sec yields, reflecting the effect of repo rate cuts. Many firms which were facing liquidity issues following the crisis that emerged last year have borrowed to fulfil their capital requirements.”

It is noteworthy that the yield on the benchmark G-Sec dropped close to 114 basis points from April 2019 highs to as low as 6.34% by August this year — a reason why borrowing costs dropped for high-rated firms despite the rise in spreads.

The fall in the benchmark yield this year led to a fall in the borrowing cost for AAA-rated companies. In August 2018, REC issued 10-year bonds at a coupon rate of 8.55%, while in June this year, the company issued a paper with the same maturity at the rate of 8.30%.

Similarly, Aditya Birla Finance issued three-year NCDs in June 2018 at 8.90%. In August this year,the company was able to raise funds at just 8% via similar tenure paper. However, the scenario was bleak last year when the benchmark yield rose 82 bps from April 2018 to 7.95% by August 2018.

Although borrowing costs remained low for AAA-rated firms, ‘AA’ or lower-rated companies saw borrowing costs remain at almost the same levels as compared to the last year despite the fall in the G-Sec yields. Going forward, experts believe the current financial year should see more companies approaching the bond market because of the Sebi’s mandate that requires large corporates — defined as a listed company with at least a ‘AA’ rating and an outstanding long-term borrowing of Rs 100 crore or more — to borrow 25% of their requirements through the corporate bond market.