Infra Firms To Dominate, To Tailor Issues To FII Needs

By Reuters

  • 10 Oct 2011

Infrastructure firms are likely to be dominant issuers in India's corporate debt market this week, offering paper targeted at foreign investors who have won new limits to buy such debt.

However, other issuers are likely to stay away as the cost of capital for private companies have surged after the government increased its fiscal second half borrowing to Rs 2.2 trillion ($44.5 billion) from the budgeted Rs 1.67 trillion.

"The regular bond issuances are remote as of now as corporate bond yields have gone up sharply. There is no courage seen by issuers to come forward to the market currently," said Ashish Agarwal, executive director, AK Capital.


Since the announcement of enhanced borrowing limits by the government, the benchmark five-year bond has risen 16 basis points to 9.65 per cent till Friday and the 10-year corporate bond yields have jumped 17 basis points to 9.67 per cent.

"The yields of the underlying government securities as well as the corporate bonds have been fairly choppy. I don't see too many corporate issuances till such time as these yields stabilize," said Nirav Dalal, president & managing director, debt capital markets at Yes Bank in Mumbai.

Infrastructure firms are however likely to take advantage of newly auctioned corporate infrastructure debt limits for FIIs which saw good demand after the lock-in period restrictions were revised. The government has lowered the lock-in period for such debt to 1-year from 3-years previously.


India's auction of $5 billion in corporate infrastructure debt to FIIs was over covered, four market sources said on Friday. FIIs bid for a total of Rs 347.11 billion compared to Rs 224.19 billion on offer.

Infrastructure Development Finance Co and Rural Electrification Corp are some of the firms who have announced issuances to take advantage of the new found demand from FIIs.

"I guess the shorter tenor bonds of infrastructure companies are the ones that will continue to happen," Dalal said.


Issuers, eligible to issue tax-free bonds, may also hit the market.

India has allowed four firms to raise 300 billion rupees via tax-free bonds in the current financial year that began April 1.

National Highways Authority of India (NHAI) and Indian Railway Finance Corp (IRFC) can each raise 100 billion, while Housing and Urban Development Corp. (HUDCO) and Power Finance Corp (PFC) can each raise Rs 50 billion, the Central Board of Direct Taxes said in a notification posted on its website.


PFC, HUDCO and IRFC have already hit the market with small borrowings via tax free private placements, while NHAI is working on a retail issue.

Fears the Reserve Bank of India (RBI) may continue to raise policy rates to tame inflation despite domestic growth worries may also keep yields from slipping lower, traders said. However, market participants are slowly moving towards expecting the central bank to pause on the back of the global turmoil.

Analysts polled after the central bank's mid-September policy expected the RBI to deliver the last blow in its current tightening cycle which has lasted over 18 months when it reviews policy on Oct. 25.


The spread between the five-year corporate bond and government bond was 81.54 points on Friday, from 88.81 basis points on Wednesday.

The spread between the 10-year corporate bond and government bond at 79.79 basis points on Friday from 85.23 basis points at its previous close.

"Corporate issuers are likely to wait for the monetary policy to be out of the way before they come back to the markets," Dalal added.

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