Bond issuance by India Inc rises

Subject :Economy

Section: Capital market

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

Key Points:

Several corporates are preferring corporate bonds over bank loans to meet their financing needs. The principal reason for the surge is bond yields that are comparable to interest rates apart from the greater liquidity that bonds offer over bank loans.
India Inc. raised 54 per cent more resources via bonds in the first half (H1) of FY24, moving away from bank finance.
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 momentum could turn sluggish for a couple of months due to tight liquidity in the system and a rise in bond yields

Who were the main issuers:

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.

Why are bonds being preferred currently?

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.
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.
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.
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.
Lastly 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.

What are the general differences between bond vs bank finance?

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.
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.

What are market linked debentures (MLD)?

MLDs are debt securities, structured in a manner that you get to benefit from any upside in equity markets too. The payout is not a fixed annual return but an assured minimum return plus any market upside.
Generally sold as two-year debenture which assures around 14 percent return at maturity with anytime liquidity. Also known as structured products, MLDs have been around for more than two decades.
A minor portion of the face value of the MLD is linked to equity market returns through call options and the remaining amount is invested in a bond.
The call options provide the upside returns while the bond ensure minimum returns.
Example: For the MLD of 2 year term with assured return of 14%, the assured return at 6.58 percent comes from the issuer and is lower than the 7 percent annual interest that some of the banks are offering on a two-year fixed deposit.
However, equity-linked MLDs are not necessarily comparable to fixed deposits as the objective is upside participation in equity returns with minimum risk.
Till December last year, the Securities and Exchange Board of India had mandated a minimum investment of Rs 10 lakh for privately placed debt, which has since been altered to Rs 1 lakh.

TLTRO (Targeted Long-Term Repo Operations) loans

During Covid pandemic access to easy capital and influx of cash at low-interest rates were of paramount importance for many distressed sectors and companies. To address this RBI launched the TLTRO (Targeted Long-Term Repo Operations) loans.
Under the scheme, the RBI would allow banks to extend liquidity by pledging government securities with the central bank and then invest the said liquidity back into the economy.
Targeted long-term repo operations (TLTRO) are borrowed from the central bank at repo rates, which currently stand at 4 percent, for a period of three years.
These funds need to be invested in corporate bonds, commercial papers, and non-convertible debentures distributed in 31 specific sectors. These sectors were chosen based on the stress they were in as a result of the pandemic.
The scheme provided banks with a liquidity option for the long-term unlike short-term policies like liquidity adjustment facility (LAF) and marginal standing facility (MSF) that the RBI offers to banks.