HDFC, REC Bond Issues Show Edginess In Primary Debt Markets Persists

The primary debt markets, which saw a test of sentiments of sorts this week, are sending out a message that all is still not well despite recent policy interventions.

Activity in the primary markets had dried up in the second half of March due to nervousness across global and financial markets due to the widening spread of Covid-19. To ease market conditions, the Reserve Bank of India cut rates and offered specially designed long term liquidity to banks. A part of this was intended to revive primary debt markets.

However, the response to two companies that tested the markets this week suggests that appetite remains low and risk aversion remains high.

• On Wednesday, the Housing Development and Finance Corporation Ltd. raised Rs 2,500 crore, at a coupon rate of 7.2 percent, according to data from the National Stock Exchanges’ electronic bidding platform. It did not utilise any part of a greenshoe option of Rs 7,500 crore.
• The funds were raised at a spread of 168 basis points over the benchmark 3-year government. In February, when HDFC raised funds for a similar duration, the spread was lower at 118 basis points.
• On Tuesday, Rural Electrification Corporation Ltd. withdrew its 10- year bond issue as investors were seeking a higher coupon rate, according to two bankers familiar with the matter. REC had planned to raise Rs 1,000 crore through a two-part bond issue.
• Among non-financial corporations, Apollo Tyre Ltd. raised Rs 500 crore via a 10-year bond at a coupon rate of 8.75 percent.

Debt capital market bankers say the experience of this week suggests that investor appetite is still weak.

Companies need to manage their expectations in terms of the size of the issue and the coupon rates they want and they need to ensure they get proper commitments from investors, said a banker, who spoke on condition of anonymity.

Another banker said that timing played a role in the subdued interest garnered by these issues. Government bond yields have risen this week due to fears of increased central and state government borrowings. Also state governments raised funds at an auction on Tuesday, which may have sucked out liquidity.

“Bond markets have been behaving pretty erratic and yields are all over the place. Markets have not stabilised, despite the Reserve Bank of India announcing a rate cut and the targeted long-term repo operations,” said Lakshmi Iyer, chief investment officer - debt and head - products at Kotak Mutual Fund.

Other issuers likely to test the market in the next few days include National Housing Bank, National Bank for Agriculture and Rural Development, Adani Ports and Special Economic Zone Ltd., Power Grid Corporation Ltd. and the Housing and Urban Development Corporation Ltd., according to Bloomberg.