India Inc.'s Return to 2025 Bonds Shows RBI Done Cutting for Nowby
RBI interest-rate cut seen spurring long rupee bond sales
Issuers seen preferring bonds over loans on cheaper costs
Indian companies have started selling 2025 bonds again and that may signal Governor Raghuram Rajan’s surprise half-point interest-rate cut will be the last for some time.
Sales of rupee-denominated notes dated beyond five years may rebound from a four-year low after Rajan sliced India’s policy rate 50 basis points on Sept. 29, say two of the biggest arrangers. Little-to-no prospects of further cuts have already prompted Rural Electrification Corp. and LIC Housing Finance Ltd. to lock in rates by borrowing for 10 years.
“Indian companies will now look to borrow for longer duration from the bond market as the RBI is unlikely to cut the key benchmark rate anytime soon,” said Sandeep Bagla, a Mumbai-based associate director at Trust Capital Services India Pvt., 2015’s second-biggest arranger of local-currency offerings. “Issuers will continue borrowing through bonds rather than loans as the spread is significant.”
The Reserve Bank of India will pause its easing cycle until at least March, said most analysts surveyed by Bloomberg, after Rajan said he had “front-loaded” cuts and wants to ensure they’re passed on by lenders. Bonds are being favored over loans as top-rated 10-year notes yield 8.2 percent, while the minimum rate at the largest lender, State Bank of India, is 9.3 percent.
Local firms issued 1.1 trillion rupees ($16.97 billion) of bonds longer than five years since Dec. 31, just a third of this year’s total record sales and 11 percent down on the same period in 2014, data compiled by Bloomberg show. Since the RBI’s rate cut, yields on 10-year AAA-rated company debt have fallen 22 basis points to the lowest since May 2013, while those on top-rated 15-year paper eased 8 basis points to 8.3 percent.
“Issuance of domestic rupee bonds maturing beyond five years is likely to increase in the next quarter,” said Ajeet Agarwal, the New Delhi-based finance director at Rural Electrification, who thinks there may be another 25 basis-point cut in the next quarter if inflation trends as per RBI’s targets. The central bank forecasts consumer prices increasing 4.8 percent in the first three months of 2017.
State-owned Rural Electrification and mortgage firm LIC Housing Finance have both sold bonds longer than five years since the rate reduction. Rural Electrification, the third-biggest issuer of rupee notes this year, on Oct. 7 issued 10-year taxable bonds for the first time since April, while LIC Housing sold similar-maturity notes a day later.
Long-term issuance also appeals because volatility has subsided, Agarwal said. A measure of 120-day volatility for the notes is at 3.07 percent from as high as 4.12 percent in June. It touched as low as 2.76 percent on Sept. 29.
Some companies will still be reluctant to borrow long-term money as corporate bond yields may fall further, to around 8 percent by the end of March, according to Shashi Kant Rathi, the Mumbai-based head of investments and capital markets at Axis Bank Ltd., the No. 1 arranger of rupee notes since 2007.
“It will take some time for bonds above five-year maturity to pick up pace as some market participants are betting on another rate cut,” Rathi said. “On the whole, rupee bond sales will continue to soar high as they are more cost-effective than loans.”
Rathi expects total local issuance to reach 5 trillion rupees by the end of 2015, while Trust’s Bagla sees sales at 5.5 trillion rupees by the end of March. Indian issuers have borrowed 3.27 trillion rupees via bonds so far this year, data compiled by Bloomberg show.
East North Interconnection Co., a unit of telecommunications cable maker Sterlite Technologies Ltd., plans to refinance 9.25 billion rupees of loans with bonds, a person familiar with the matter said this week. SP Jammu Udhampur Highway Ltd. in August sold 15-year annuity-backed bonds to refinance existing foreign and local currency loans.
“I expect rupee issuance to remain robust as borrowing costs have fallen and as bonds are cheaper than loans,” encouraging refinancing, said Shameek Ray, the Mumbai-based head of debt capital markets at ICICI Securities Primary Dealership Ltd., the No. 3 arranger. “Issuers will now begin to look at borrowing for the longer term.”