Falling Loan Costs No Threat to Record Rupee Company Bond Sales

  • Companies to sell 10% more rupee debt this year, Axis says
  • India’s RBI seen cutting interest rates this quarter

Axis Bank Ltd., India’s biggest bond underwriter, expects rupee-denominated issuance to rise to a record for the third straight year as notes remain cheaper than loans even after banks slashed lending rates.

Companies will sell at least 5.5 trillion rupees ($80.9 billion) of debt this year, up 10 percent from 2016, according to Axis, the No. 1 arranger of rupee bonds since 2007. Average yield on top-rated three-year corporate notes is at 7.21 percent, 94 basis points lower than a similar maturing loan at the nation’s largest lender State Bank of India. That gap was at 176 basis points on Dec. 30 before SBI cut its lending rates earlier this week.

“Though the rate differential between bond yields and lending rates may have halved, it is still substantial to prompt issuers to choose bonds over loans,” said Shashi Kant Rathi, head of investments and capital markets at Mumbai-based Axis Bank. “There could be some marginal impact, but it will not take the sheen away from bonds.”

Borrowing costs in Asia’s third largest economy are tumbling after a Nov. 8 decision by Prime Minister Narendra Modi to ban high-value currency notes saw citizens rushing to lenders to free themselves of the defunct notes, flooding the financial system with cash. This move is seen damping consumer demand and weighing on economic growth. That’s raised bets that the Reserve Bank of India will cut its benchmark rate this quarter.

Indian firms borrowed an unprecedented 5 trillion rupees from the bond market last year and 4.9 trillion rupees in 2015, data compiled by Bloomberg show. NHPC Ltd., the hydro-power company based in the northern state of Haryana, in November said it plans to sell 22.5 billion rupees of bonds. Eros International Media Ltd., a Bollywood filmmaker and distributor, last month approved plans to raise 20 billion rupees through notes.

“There is a high chance the central bank will cut interest rates next month to support growth and also as inflation is benign,” said Rathi, who expects the RBI to reduce rates by as much as 50 basis points this year. “With the central bank nearing its easing cycle, many companies will want to lock in rates, and hence opt for bonds.”

India’s economy, which grew 7.3 percent in the September quarter from a year earlier, is seen slowing to 6.5 percent in the fourth quarter. Consumer prices rose 3.63 percent in November from a year earlier, the slowest pace in two years. The yield on AAA-rated five-year company notes tumbled 102 basis points to 7.37 percent last year, the most since 2002, data compiled by Bloomberg show. It was at 7.36 percent on Wednesday.

Regaining Share

IDFC Bank Ltd. expects the country’s loan markets to regain their lost share after banks lowered lending rates based on marginal cost of funding. Loan growth slowed to 9.7 percent in the year through Dec. 9, compared to an average of 13.5 percent in the previous five years, as many banks focused on recovering bad debt rather than making new lending.

“Big lending rate cuts by Indian banks could prompt companies to choose loans over bonds,” said Jayen Shah, Mumbai-based head of debt capital markets at IDFC Bank. “Any unexpected moves in RBI’s monetary policy and a sharp fall in the currency could further dampen the bond market.”

Companies borrowed 1.42 trillion rupees of local-currency loans last year, 28 percent lower than 2015, according to data compiled by Bloomberg.

“Bond issuance could slow down initially due to the big lending rate cuts by banks, but will pick up pace as corporates see interest rates bottoming out going ahead,” said Shameek Ray, the Mumbai-based head of debt capital markets at ICICI Securities Primary Dealership Ltd. “Corporates will choose fixed coupon rate bearing bonds to lock in the current low yields as there is limited room for bond yields to fall further.”

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