The Hindu Business Line : Corporates shy away from CPs, bonds

CORPORATE appetite for raising money through instruments other than regular bank loans seems to be on the wane. Raising money through commercial paper (CP) - an instrument that can be used only by top-rated corporates - and bonds was quite popular earlier.

Companies that possessed a good credit rating could raise funds at 5-6 per cent through these papers. A regular bank loan might have cost them anything between 10.5 per cent and 12 per cent, going by card rates.

CPs were a preferred means of diversifying the investor base as well as a tool to manage short-term fund flow problems.

Mr N. Sampath Kumar, Executive Director, Ashok Leyland Finance, which has raised about Rs 765 crore cumulatively through CPs so far this year, said: "CPs score because of quantum availability, competitive pricing and speed. A regular application for credit may take weeks for banks to deliver, whereas a CP raising can often be done within an hour and the deal worked on the phone."

Despite these advantages, two factors have contributed to the decline in new debt issuances. Firstly, the bottoming out of interest rates.

As Ms Roopa Kudva, Chief Rating Officer, Crisil, said: "Companies don't have the same need to refinance high-cost debt as in the previous years. Since borrowings for capital expenditure are not happening, volumes in new debt issuances are likely to remain sluggish if refinancing is not attractive."

Interest rates for top borrowers have seen a relatively lower fall of 0.88 per cent in 2002-2003 compared to a fall of 2.35 per cent in 2001-02.

Also, the gap between the interest rates on CP/bonds and regular bank loans also have narrowed down, after banks began offering CP-linked rates on regular loans.

The second factor has been the regulatory tightening on bank investments in bonds.

An RBI/SEBI fiat issued a few months back requires banks to invest only in rated and listed securities.

A senior official in a public sector bank said that in the confusion created after the directions were issued, the bank stopped investing in CPs.

The lukewarm approach to these papers is visible. Bank investment in CPs declined by 26 per cent during calendar 2003 while investment in bonds showed a 0.7 per cent growth.

During the same period, traditional funding methods of working capital loans/cash credit saw a 16 per cent growth.

Ms Kudva expects the market to reorient itself to the changes made by the RBI and sees the decline in activity as only temporary.

However, banking sources are a bit pessimistic. They say that it now takes a month to make a placement compared to a day that it took earlier.

They cite the example of public enterprises such as Power Finance Corporation (PFC) and IRFC, which used to be active in the primary debt market, taking loans from banks and financial institutions.

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