India Inc raised 54% more resources via bonds in H1 of FY24

The amount raised through corporate bonds in H1FY24 (at ₹4,93,191 crore) was on the higher side compared to H1FY23 (at ₹3,21,070 crore). The main borrower during the first quarter of FY24 was HDFC Ltd., which extensively tapped the bond market before merging with HDFC Bank. Public sector undertakings and large NBFCs, called flow-issuers, are very regular in tapping the bond market. Many first-time issuers, corporates, InvITs, REITs, and banks — Infra, Tier-2, and Tier-1 bonds — and lower credit-rated issuers through structured finance tapped the bond market during H1FY24. However, bond issuances declined starting in July, post-HDFC-HDFC Bank merger, hawkish stance of the MPC, negative liquidity, etc.

The NCD/non-convertible debenture pipeline of AAA-rated corporates is expected to slow down at least for the next 1-2 months due to tight liquidity in the banking system, a recent increase in bond yields due to the announcement of OMO (open market operation) sales (which may increase supply of government bonds), and concerns about domestic and external factors that may affect policy rates. Corporate issuers and banks may prefer to tap funds through money market instruments due to the expectation of a reversal in the interest rate cycle starting in the second quarter of the next fiscal. Lower credit-rated issuers, too, have been successful in raising funds through bond markets, either through the private placement route or the public issuance route.

The market is finding increased investment appetite from HNI (high net worth individuals) clients in high-yield instruments due to a change in income tax rules, which has affected MLD (market-linked debentures) issuances and debt MFs.

For “AAA” and “AA+” credit-rated corporates, the bond market yields have been consistent for a while, with little volatility (of 0–20 basis points) as compared to bank loans. Large insurance companies, provident funds, and pension funds will continue to have a huge investment appetite due to the availability of attractive yields and also to comply with regulatory investment guidelines in H2FY14. The yield difference between Indian Government Bond and AAA-rated large/PSU Corporate bonds, too, are compressed in the range of 10 basis points (bps) to 30 bps only. Further, corporate bonds provide more liquidity to issuers compared to bank loans. Mostly, the interest is payable annually and the principal is paid at the end of the redemption period for corporate bonds, compared to bank loans, where interest is generally payable monthly and the principal is payable quarterly.

Further, corporate bonds are mostly carrying fixed-rate coupons compared to bank’s floating-rate loans.

Credit growth is happening across the sectors, and both banks and NBFCs are in some way competing with each other in lending. Further, considering the tight liquidity situation, banks have become somewhat selective in lending. NBFCs too are looking for fresh funds over and above bank funding and are also trying to refinance the erstwhile TLTRO (Targeted Long-Term Repo Operations) loans availed from banks during the Covid period. Better credit-rated corporates still find the bond yields attractive compared to current MCLR (marginal cost of funds-based lending rate) loans. Banks don’t lend funds for acquisition deals, unlike bonds. Entities borrowing funds through the bond market to fund acquisitions are on the rise this fiscal. Lower-rated NBFCs, based on credit growth, really want to expand their reach across the regions. Even though the rates are marginally higher than MCLR loans, they would like to borrow funds over and above bank loans from different baskets of investor segments and hence prefer to tap the bond market through the private placement route and the public issue route.