The Hindu Business Line : Corporate borrowing spreads rule high despite rising liquidity

Banking sources said wide spreads stemmed partly from poor investor appetite for medium- and long-term issues. Triple ‘A’ rated corporate debt papers are currently priced at 250 basis points plus over comparable sovereign papers. These spreads have hardly moved since the beginning of this financial year.

The IDBI Gilts Vice-President and Treasury Head, Mr S. Srinivasa Raghavan said, “There is no interest in dated corporate bonds. Preference is only for certificates of deposits (CD) and commercial paper (CP) since liquidity remains at a premium.”

The yield on CDs currently range between 4.6 per cent and 5.5 per cent for tenors of six and 12 months respectively. CP yields are about 100 basis points higher for identical maturities.

Shy away from longs

Yet, such low yields hardly deterred investors. Mutual funds, for instance, continue to remain large investors in these instruments. Fund interest for such short-term securities pushed down yields by as much as 600 basis points since the beginning of this financial year.

However, institutional investors, particularly mutual funds, remain risk-averse to picking up long-term corporate debt papers. Credit rating agency ICRA General Manager, Mr Jayanta Chatterjee, said, “The basic overhang of credit risk aversion continues in the market.” The risk aversion has now begun reflecting in the high spreads.

Attempts by issuers to drive down spreads have also been unsuccessful. This was evident from the response to the Rural Electrification Corporation’s bond issue. REC was pushed to reprice the five-year issue, five basis points higher at 7.7 per cent. Moreover, in the secondary markets Triple ‘A’ rated public sector bonds are already quoted at close to 7.9 per cent or about 175 basis points over sovereign papers of identical maturity.

The high spreads were despite the banking system being awash with liquidity. The high liquidity was evident from the recourse to the reverse repurchase window of the Reserve Bank of India today. The recourse amounted to Rs 1,41,350 crore at today’s auction. Risk aversion was also evident from the spread difference between public and private sector Triple ‘A’ rated papers. The spread between a private and public sector corporate bond is at least 150 basis points.

Liquidity preference

Bankers said that the high spreads also reflected a liquidity preference. Corporate bonds are treated as illiquid instruments in the current market conditions. This is particularly for private sector corporate bonds, where the discounting was high in the Collateralised Borrowings and Lending Obligations market.

However, despite high spreads on Triple ‘A’-rated bonds, the effective cost of raising funds to issuers were at least 200-300 basis points below the current benchmark prime lending rate. Corporate securities such as Double ‘A’ that are higher risk rated were able to raise funds at the below the current prime lending rates.

Banks’ benchmark prime lending rates currently rule between 12 per cent and 13.25 per cent. But the last Double ‘A’ rated corporate borrowings, by Bajaj Auto Finance, was done at 9 per cent.

Financial intermediaries, mostly insurance companies, were increasingly beginning to look at corporate bonds to take advantage of the high yields. Insurers that had shifted to Government securities in the last quarter of the financial year were hit by shrinking mean yields. Mean yields of insurance fixed income investments are currently less than 8 per cent due to this shift. As a correction insurers were now beginning to move into well-rated corporate securities, both short- and long-term. The last Tata Motors issue, for instance, was picked up by Life Insurance Corporation at 10 per cent. Similarly, another Tata Steel 10-year issue priced at 11 per cent was also lapped up by LIC. But some insurers, traders said, preferred to wait, implying that yields were likely to harden in the coming weeks as Government borrowings soak up the liquidity.

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