Corporate bond sales set to plunge in Q1 after best quarter in 5 years

After posting their best quarter in five years, rupee bond sales by Indian companies are set to retreat in the three months to June, if history is any guide.

Issuance from businesses in Asia’s third largest economy is seen declining to as low as 1.13 trillion rupees ($17.4 billion) this quarter, according to IDFC Bank Ltd., down from 2.01 trillion rupees sold in the three months to March. A look at market behavior in the last five years shows sales tended to fall in the April-June period as companies draw up debt plans for the new fiscal year and refrain from big-size borrowings.

“Companies have to refresh their borrowing plans and wait for internal board approvals before they start raising money again,” said Jayen Shah, Mumbai-based head of debt capital markets at IDFC Bank. “This is a seasonal phenomena, where rupee bond offerings gather momentum through the year with peak volumes in last quarter of the financial year. ”

Bond issuance in the first quarter of 2017 surged as firms sought funds to meet their year-end financial needs and bets grew that borrowing costs won’t decline further after the central bank in February signaled an end to its easing cycle, according to Axis BankBSE 1.63 % Ltd., the top arranger of rupee bonds since 2007. The average yield on top-rated three-year corporate notes rose 12 basis points that quarter to 7.42 percent, while those on 10-year securities climbed 36 basis points to 7.94 percent, according to data compiled by Bloomberg.

“For the June quarter, issuance will come down as companies will be busy preparing their financials and chalking out plans on their borrowing for the financial year,” said Shashi Kant Rathi, head of investments and capital markets at Mumbai-based Axis Bank, who expects sales to be in the 1.2 trillion rupees to 1.25 trillion rupees range this quarter. “Issuance will dip sequentially.”

Going Long
Companies switched over to bonds maturing in five years and less in the first quarter after the Reserve Bank of India’s unexpected change in stance to neutral from accommodative steepened the yield curve to the most since August 2010. Issuers borrowed 68.2 percent of the total issuance via notes dated up to five years, Bloomberg-compiled data show.

However, Rathi says this is a good time for companies to borrow long-term money as those rates are expected to remain steady. “Indication that the RBI will not cut interest rates and big supply of long bonds from the federal and state government going forward will keep the rates on 10-year corporate notes higher.”

Not everyone expects a big drop in bond issuance in the coming quarter. ICICI Securities Primary Dealership Ltd., the fifth biggest underwriter of local currency notes last quarter, says companies may choose to tap the debt market as borrowing from bonds remain cheaper than bank loans. He sees issuance of between 1.2 trillion rupees and 1.5 trillion rupees this quarter.

“Issuers who had deferred their fundraising plan may return to borrow in this quarter with markets expected to remain stable,” said Shameek Ray, the Mumbai-based head of debt capital markets at ICICI Securities Primary. “Given the government’s thrust on building infrastructure, we expect continued large issuance from lenders to infrastructure.”