The Hindu Business Line : Liquidity squeeze hits commercial paper issuances

Shrinking volumes
One of the major reasons for the low level of issuances is the high cost.
The drop is also partly prompted by some banks reviewing credit lines.

C. Shivkumar

Bangalore, Nov. 3 Commercial paper (CP) issuances have become the first casualty of tight liquidity conditions in the financial markets.

CPs or short-term corporate debt instruments have completely disappeared from the markets. In October, the issuances were expected to be about Rs 1,000 crore. CPs are short-term debt instruments that allowed short-term fund raising for maturities up to one year. Banks and financial institutions, among the largest subscribers to CPs, though mostly prefer tenures of anywhere between 90 and 180 days.

One of the major reasons for the low level of issuances was the high cost. The IDBI Gilt Vice-President, Mr S. Srinivasa Raghavan, said, “There is an enhanced counter party risk perception, leading to high spreads.” The high spreads were evident from the difference between the 91-day Treasury bill yield and the CP issuances by some Triple ‘A’ rated companies. Tata Motors CP maturing in February was placed at 13.50 per cent or at a spread of 600 basis points over the 91-day T-bill yield.

Last year, the spreads were barely 150 basis points, powered by inflows from the foreign institutional investors that also picked up CPs as part of their corporate debt portfolio. But FIIs have continuously unwound their investments both in debt and equity since the beginning of this year. This, in turn, cut off one source of investors in CPs.

Mutual funds and banks have also cut back on investments in the instruments. Funds’ cutback stemmed from high redemption pressures. Banks, on the other hand, have begun cherry picking CPs taking only those from highly rated companies.

The drop in issuances was also partly prompted by some banks reviewing credit lines.

Standby credit lines

Some CP issues made in the markets during the early part of this year, when liquidity was less of a worry, were largely supported by standby credit lines or back stop facilities from some banks.

The standby credit line facilities were used as credit enhancement mechanisms by issuing corporates. Although, corporates with a credit rating of P2 by CRISIL or A2 by ICRA are allowed to raise CP issues, investors mostly prefer A1/P1 rated papers.

But bankers said most of the banks have put the credit lines under review as a result of which standby facilities would also be impacted, with a consequent effect on the rating of the CPs. This move by the banks in turn has resulted in shrinking the CP volumes. Between September 15 and September 30, CP issues shrank by over Rs 1,300 crore.

Bankers said that some credit lines were reviewed in view of the tight liquidity situation in the markets. Besides, they said, some corporates had drawn down their credit lines for treasury management purposes. Banks have now decided to choke off such practices.

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