The corporate bond market saw a spurt of activity on the 23rd of April with Hindalco and Tata Steel privately placing ten year debt at 9.55% and 9.80% respectively. The amounts placed was Rs 3000 crores for Hindalco and Rs 1500 crores for Tata Steel and both the placements were taken up by the underwriters. Hindalco is rated AA+ by CRISIL while Tata Steel is rated AA+ by CARE and the spreads over the corresponding benchmark ten year government bond were 80bps and 105 bps respectively. Hindalco bonds carry a coupon of 9.55% while Tata Steel’s bonds carry a lower coupon of 2% and the bonds are issued at discount to face value. Low coupon bonds are attractive for FII’s as the withholding tax amount is lower.
The fact that these two companies could place debt at seemingly fine levels at a time when FII’s are cool towards Indian bonds has woken up a dormant corporate bond market from its slumber. Indian Oil Corporation rated AAA by Fitch is in the market to raise three year money for Rs 1500 crores at levels of 9.15% to 9.40% book building and others are set to follow. The question is whether these large issuances are the first of many, which could potentially lead to corporate bond market revival?
The corporate bond market has been wary of a large government borrowing program crowding out the market and a new SEBI law on rollover of limits limiting FII participation. The government is borrowing Rs 370,000 crores in the first half of fiscal 2012-13 and liquidity is still in deficit despite CRR cuts of 125bps, RBI bond purchases of over Rs 100,000 crores and a repo rate cut of 50bps. Banks are borrowing around Rs 90,000 crores from the RBI on a daily basis indicating the tightness in liquidity. The fact that the Rupee is at a three month low against the US Dollar, is increasing liquidity worries as if RBI sells USD to maintain Rupee stability, liquidity will tighten further.
FII activity in corporate bond has been hit by the SEBI restrictions on rollover of limits if bonds are sold before maturity. FII’s who have filled up the corporate bond limits and want to sell the bonds will not be able to buy them back as they have to apply for fresh limits from the regulator. The recent tussle on tax issues between FII’s and the government is also hurting sentiments on FII investments in bonds. A weakening Rupee does not help either, as a weak currency is a deterrent for investments in debt by FII’s. Debt limits of around Rs 30,000 crores in government and corporate bonds and Rs 75,000 crores in infra bonds with three year lock in period was open as of 31st March 2012.
Government bond yields are not providing comfort for corporate bonds either. Ten year benchmark government bond yields are trading at levels of 8.56%, up from lows of 8.2% seen in February 2012. The pressure of weekly bond auctions with sizes ranging from Rs 15,000 crores to Rs 18,000 crores is telling on government bond yields. The outlook for government bond yields is not very positive in the near term.
The positives for corporate bonds are the absolute levels of yields and this could attract investors. Yields of 9.5% and 9.8% for ten year bonds provide a cushion for investors as they earn higher interest. Hence corporate bond yields could remain sticky at higher levels despite pressure on liquidity and pressure on government bond yields.
Investors in Hindalco and Tata Steel bond are not likely to suffer losses and if they are patient they will see profits if there are hints of more rate cuts ahead by the RBI. There will also be more issuers waiting to issue bonds and this will lead to a more active market going forward.