Corporate bonds

Private placement | Corporate Bonds: Fundraising through debt placement drops 39% to Rs 32,405 million in April-May due to rising interest rates

Fundraising by listed companies through private placements of corporate bonds fell 39% to Rs 32,405 crore in the first two months of the current financial year, and the outlook for the rest of the financial year are also uncertain due to the expectation of a further rise in interest rates. In comparison, Rs 53,253 crore was collected on the road in April-May 2021-22, according to data from the Securities and Exchange Board of India (Sebi).

Notably, fundraising through lane dipped to a six-year low in 2021-22 at Rs 5.88 lakh crore due to strong performance of equities and aggressive disbursement of funds by banks at a rate of lower interest.

“In addition, the outlook for the remainder of the year is quite uncertain as interest rates are expected to firm further, liquidity to tighten and inflation to remain elevated. In such an environment, aggregate demand is expected to remain subdued, thus suppressing the demand for credit as well,” said Sandeep Bagla, CEO of Trust MF.

Several factors will dictate fundraising activities across the mode, such as the interest rate cycle, renewed confidence in the investment cycle and currency depreciation cycle, said Divam sharma, co-founder of Green Portfolio.

Fundraising by BSE and NSE listed companies was subdued at Rs 32,405 crore in April-May of the current financial year 2022-23. It was 39% less than a year ago.

Listed companies raised a lower amount of funds through bonds and credit drawdown from banks was also slow. Listed companies may be sitting on excess cash, Bagla said.

“With global central banks raising rates to curb inflation, interest rates have risen and as a result capital market investors expect a higher rate of return. This invariably means that the cost of borrowing for listed companies through corporate bonds has increased and is not as lucrative as before,” said Sonam Srivastava, founder of Wright Research, Sebi Reg Investment Advisor.

Green Portfolio’s Sharma said rising bond yields due to high inflation and resulting expectations of higher interest rates have caused bond prices to correct. In the first two months of the current fiscal year, 10-year bond yields in the United States had reached 3.3%, which, combined with expectations of currency depreciation, had deterred institutional investors (DII and REITs) to invest money in these bonds for the long term.

In terms of issuance, 137 emissions were recorded during the reporting period, compared to 192 emissions in April-May 2021-22.

In the near term, rate hikes will be executed by central banks, which would hamper corporate bond market volume, Srivastava said.

“Only companies that are in dire need of capital and have unforeseen borrowing needs could turn to corporate bond markets,” she added.

For listed companies, corporate bonds are the most flexible way to raise funds. They use funds raised from corporate bonds to expand product/service offerings, establish new manufacturing facilities, purchase plant and machinery, and spend on capex.

It must be recognized that for a company to raise funds, there are distinct means, but they prefer to go the corporate bond route as it offers existing promoters and shareholders non-dilution of equity.

Debt markets are primarily operated by companies in the financial sector which use funds to lend (as the economic cycle accelerates) and build up capital buffers.

The non-financial group deploys the funds primarily for general business expenses, capital expenditures, and for inorganic growth opportunities outside of refinancing existing debt.

Apart from capital raised through private placement of corporate debt, a total of Rs 1,682 crore came from public issuance of corporate debt during the reporting period.

Experts believe that high to constant liquidity in the system and an overall decline in credit drawdowns would still maintain low reliance on public issuance of corporate debt.