More Stories

Informist, Monday, Aug 26, 2024

 

By Sachi Pandey and Vaishali Tyagi

 

MUMBAI – The corporate bond market is set for a supply-heavy week, with multiple banks and public sector entities coming up with bond offerings, leaving investors spoilt for choice. Bonds worth over 155 bln rupees are expected to hit the market this week, as issuers seize the opportunity to raise funds amid favourable market conditions. The week is eventful not just due to the quantum of supply, but also because of the novelty factor associated with the bonds on offer.

 

Market sentiment is upbeat after US Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Economic Symposium on Friday, in which he indicated a clear intent to commence rate cuts in the world's largest economy from next month.

 

Market participants are particularly keen on the forthcoming issuances by state-owned banks, which are set to raise funds through a variety of bonds. Among the most anticipated, Bank of Baroda is all set to tap the market with its first infrastructure bond for the financial year. The bank plans to raise up to 50 bln rupees through infrastructure bonds maturing in 10 years, bidding for which is scheduled today. 

 

This issuance is expected to draw significant interest given the bank's AAA rating and the strong demand for infrastructure bonds. The coupon rate for Bank of Baroda's 10-year bond is projected to be between 7.30% and 7.40%, 30-40 basis points above 10-year benchmark government bond, sources said. The bank last tapped the bond market with infrastructure bonds in January, raising 50 bln rupees through a 10-year at a 7.57% coupon. The issue was fully subscribed.

 

Infrastructure bonds have been gaining traction due to their benefits for both issuers and investors. The bonds are considered senior bonds, unlike subordinated bonds such as tier-II or Basel-III compliant additional tier-I bonds, which give their investors a higher claim in the event of a default. Investors are keen on infrastructure bonds because they offer long-term, secure investments with no risk of write-offs. For issuers, these bonds are advantageous as they provide good pricing and allow for large-scale capital deployment. 

 

Another state-owned lender, Canara Bank, has lined up its bond offering close on the heels of the one by Bank of Baroda. With this, the market will witness the first Basel-III compliant additional tier-I bond for the financial year. Canara Bank plans to raise up to 30 bln rupees through tier-I bonds on Tuesday. 

 

Originally scheduled for Wednesday, the bank advanced the issuance to Tuesday to avoid clashing with other issuers, sources said. "It is possible that Canara Bank preponed their bond issuance to avoid a clash with other issuers. When multiple bonds are issued on the same day, investors have limited funds, so it's strategic to issue earlier to capture demand," a dealer at a private sector bank said. 

 

Canara Bank's upcoming tier-I bond will be of particular significance to the market, as it is the first issuance of such bonds after the Securities and Exchange Board of India's relaxation of their valuation norms for mutual funds. The regulator has allowed mutual funds to value their additional tier-I bond holdings based on the bond's call option date, or yield-to-call, rather than as 100-year securities, as previously required. Other potential issuers may take cues from the pricing of Canara Bank's tier-I bond and any improvement in response from mutual funds after the new guidelines from SEBI. 

 

"Although valuation norms of AT-1 bonds for mutual funds have been changed, there is still no clarity about the treatment of these bonds in restructuring situation," Pankaj Pathak, senior fixed income fund manager at Quantum Asset Management Co, said. "For public sector banks the market seems comfortable, as they don't carry the same perceived risks, so we expect consistent demand for high-quality banks. But private banks may face challenges in generating demand for their tier-I bonds."

 

For Canara Bank's tier-I bond, the market perception is positive as the lender is tapping the market after a long time, because of which the paper is likely to be subscribed without any issues, Pathak added. 

 

Market participants expect the coupon to range between 8.30% and 8.40%, although sources said the bank was targeting a slightly lower range of 8.15% to 8.25%. The last time the bank issued tier-I bonds was on Feb 12, raising 20 bln rupees at an 8.40% coupon. The issue was fully subscribed, with the coupon 122 basis points above the five-year benchmark government bond.

Rumours are also doing the rounds that the country's largest lender, State Bank of India, may enter the market this week with a tier-II bond issuance, further heating up the already bustling market. 

 

Market participants believe investor participation will vary across different bond types, but anticipate strong demand across all these bonds, with longer-term domestic investors such as insurance companies and mutual funds showing particular interest. However, infrastructure bonds are seen as the investor favourite. 

 

"Minimum investment limits for most regulated QIBs (qualified institutional buyers) investor categories in AT-I bonds are impacting the subscription of the issuance. In contrast, tier-II and infrastructure bonds have higher investment limits, broadening their appeal to a wider range of investors,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. "Additionally, while bank AT-I and tier-II bonds have a face value of 1 crore rupees (10 mln rupees) each, infrastructure bonds are available in smaller lot sizes with a face value of 1 lakh rupees (100,000 rupees), making them more accessible to non-QIB investors and safer compared to subordinated debt instruments. 

"Ultimately, the choice between AT-I, tier-II, and infrastructure bonds depends on the investor's risk appetite and the specific needs of the issuer," Srinivasan added.

Certain less frequent public sector entities, including Hindustan Petroleum Corp and Indian Railway Finance Corp, have also scheduled biddings for their respective bonds this week. THDC is also expected to borrow funds through corporate debt, although details of the bidding have not been fixed yet. According to market participants, demand for these public sector bonds should be solid, as they have strong credit ratings and offer better yields compared to other corporate debt players.  End

 

Edited by Avishek Dutta

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.