Fresh corporate bond issuances are expected to rise to ₹8.0-8.2-lakh crore in FY21 from ₹6.55-lakh crore in FY20, as spreads on these bonds over government securities (G-Sec) of similar tenure are likely to remain narrow over the next few quarters, according to ICRA.
The spreads on corporate bonds over G-Secs of similar tenure declined to pre-Covid levels by the end of Q2 (July-September) FY21, the credit rating agency said.
Apart from liquidity infusion measures announced by the regulator since the onset of the pandemic, improved investor appetite for corporate bonds has also supported the decline in the spreads, it added.
ICRA emphasised that improved investor appetite is reflected in strong bond issuance of ₹2.2-lakh crore (up 53 per cent on year-on-year basis) during Q2 FY21, which followed an equally strong issuance of ₹2.3-lakh crore during Q1 (April-June) FY21.
With two robust consecutive quarters, the bond issuances rose to ₹4.47-lakh crore during H1 (April-September) FY21 (a jump of 174 per cent on y-o-y basis).
Anil Gupta Sector Head – Financial Sector Ratings, ICRA, said: “Though the targeted long-term repo operation (TLTRO) funding was largely utilised by the banks in Q1 FY21, the momentum in bond issuance during Q2 FY21 reflects improved appetite across investor segments.
“Given the regulatory stance of maintaining an accommodative stance of monetary policy and surplus liquidity environment, the issuances could remain strong and spreads are likely to remain narrow over the next few quarters.”
Spreads: limited scope for decline
The daily average spread on a ‘AAA’ rated three-year corporate bond over G-Sec of similar tenure narrowed to 36 basis points (bps) in September 2020 against 64 bps in February 2020. One basis point is equal to one hundredth of a percentage point.
The daily average spread on a ‘AA+’ rated three-year corporate bond over G-Sec of similar tenure declined to 83 bps in September 2020 against 104 bps in February 2020.
The daily average spread on a ‘AA’ rated three-year corporate bond over G-Sec of similar tenure declined to 117 bps in September 2020 against 133 bps in February 2020.
ICRA felt that with the spreads now below the daily average for the last five years, the scope of further decline, if any, remains limited.
The yield on 10-year G-Sec has been below 6 per cent and reverse repo at 3.35 per cent, the yields on corporate bonds have also declined across various rating categories and tenure during last six months.
“Despite the decline on yields on corporate bonds, these remain attractive in relation to other alternatives and this has also resulted in improved demand from investors thereby helping in reducing spreads,” the agency said.
Gupta opined that with improved investor appetite and vibrancy in the debt capital market, the certainty on availability of funding at competitive rates has improved.
“This could also reduce the need for maintaining high on-balance sheet liquidity by corporates and non-banks as was witnessed during H1 FY2021, amid the prevailing uncertain funding environment,” he said.
With estimated redemption of ₹4.95-lakh crore in FY21, the agency estimated that the volume of corporate bonds outstanding will rise to ₹35.5-35.8-lakh crore, translating into a y-o-y growth of about 9.2-10 per cent for FY21.