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Informist, Wednesday, Jan. 8, 2025

 

By Sachi Pandey and Vaishali Tyagi

 

MUMBAI – Corporate bond issuances in December surged 47% from the previous month, driven by the seasonal rush to meet quarter-end fundraising targets and a slowdown in credit disbursement by banks. According to data from the National Securities Depository, compiled by Informist, companies and financial institutions raised INR 1.13 trillion through 264 bonds in December, compared to INR 770.85 billion via 206 bonds in November. In December 2023, INR 1.10 trillion was raised through 279 bond issuances. 

 

"Issuances typically pick up in the last month of any quarter. Companies aim to complete their debt plans before the quarter closes. Then, there was a bit of a liquidity tightness in this quarter as well, so with credit being scarce, borrowers moved away from regular banking finance to direct capital markets," said Rajeev Pawar, treasury head at Ujjivan Small Finance Bank. 

 

The shift from bank financing to bond issuances wasn't solely a seasonal trend, but also a response to the ongoing challenges in the banking sector. The liquidity crunch that persisted throughout December was particularly severe, with the banking system's liquidity shortfall reaching its highest level in seven months due to corporate advance tax outflows and the Reserve Bank of India's foreign exchange interventions. The strained position of the banking sector left many companies seeking alternative financing options, and corporate bonds offered a promising avenue.

 

Mahendra Jajoo, chief investment officer at Mirae Asset Investment Managers, elaborated on this trend, noting that corporates have increasingly sought funding through bonds rather than turning to banks due to slower bank credit growth. "This is particularly evident among public sector undertakings, which accounted for a major portion of December's issuances in corporate bonds as government capex (capital expenditure) also slowed down, so they're coming to the bond markets now," he said. 

 

Indeed, public sector companies were the most active issuers in December, raising INR 544 billion, almost half the total issuance amount, compared to INR 233 billion raised in November. This sharp increase can be attributed to the slowdown in government spending. According to data released on Dec. 30, the government's capital expenditure during Apr-Nov stood at INR 5.135 trillion, a 12.3?cline compared to the same period last year. The slowdown in capex has left public sector companies with limited internal resources, prompting them to tap the bond market instead.

 

The influx of funds from pension funds and long-term investor funds added further momentum to bond issuances. Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP, said, "With interest inflows and redemption proceeds in hand, provident funds and long-term investors sought opportunities to reinvest. This surge in demand opened a favourable window for issuers to lock in funding at competitive yields."

 

The surge in corporate bond issuances, however, was not without market volatility. Yields on benchmark corporate bonds, those issued by the National Bank for Agriculture and Rural Development, remained largely unchanged at the end of December. However, during the month, yields saw fluctuations, driven by various economic triggers. For instance, yields on three- and five-year NABARD bonds fell by 10 basis points, while yields on 10-year bonds dropped by 6-8 basis points, fuelled by expectations of potential monetary policy easing.

 

Pawar elaborated on the dynamics at play: "While month-on-month yields looked unchanged, there was a lot of volatility throughout the month. After the GDP data was released and the stance changed by the RBI, yields fell. But then after that, we had two things happening. One, US FOMC (Federal Open Market Committee), even though they cut rates, the guidance was that further rate cuts might come at a slower pace. So, that was a slightly hawkish signal from the US. And for us, the statements which came at the last MPC and from various authorities, was that inflation is still a concern and rate cuts may not immediately happen. Thus, the market sold off a fair bit," he said.

 

India's GDP growth for the quarter ended September fell to a seven-quarter low of 5.4%, mainly due to a slump in industrial activity. This dismal performance sparked speculation about a potential rate cut by the RBI. While the bond market initially reacted positively to growing odds of a rate cut, the RBI's Monetary Policy Committee decided to maintain the policy repo rate at 6.50%, citing inflationary concerns. Instead, the RBI lowered the cash reserve ratio by 50 bps in two fortnights, starting Dec. 14.

 

BOND BONANZA

In December, Power Finance Corp. emerged as the largest borrower in the corporate bond market, raising INR 114.97 billion through four separate bond issues. Another notable issuer, Telangana Industrial Infrastructure Corp., raised INR 99.95 billion.

 

In contrast, banks witnessed a slump in bond issuances, with total fundraising dropping to INR 90 billion from INR 204 billion in November. Among the few banks tapping the bond market were Punjab National Bank and Punjab and Sind Bank, which raised INR 30 billion each. 

 

Despite the slowdown in bank bond issuances, experts anticipate a rebound in the final quarter of the year. With public sector bond issuances expected to slow down, major commercial banks such as Bank of Baroda, Punjab National Bank, and Canara Bank are expected to step in and raise funds in the capital markets. A fund manager at a mid-sized mutual fund house said, "Now that PSU issuances are slowing down, banks will likely take advantage of favourable market conditions and tap the bond market in the coming months."

 

Non-banking financial companies also participated actively in December, raising INR 125 billion, while housing finance companies raised INR 65 billion.

 

December saw a greater presence of infrequent issuers in the bond market. Companies such as Nuclear Power Corp of India, DME Development, and Telangana Industrial Infrastructure Corp. accessed the capital markets to raise funds. DME Development, in particular, issued INR 7.75 billion worth of green bonds, while Mumbai Urja Marg raised INR 24.5 billion through bonds maturing in September 2038.

 

The real estate investment trust sector also made significant strides in the corporate bond market, with Embassy Office Parks REIT and NDR InvIT Trust collectively raising INR 16.3 billion in December.

 

Looking ahead, experts predict that corporate bond issuances will continue to rise in the final quarter of the fiscal year as companies aim to complete their books before the year ends. Additionally, the spread between corporate bonds and government securities has widened recently, primarily due to concerns about liquidity. This widening spread has made corporate bonds more attractive to investors, further driving demand for these instruments.  End

 

Edited by Avishek Dutta

 

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