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Fixed Income Investors Pick NBFCs over HFCs
The Economic Times  |  June 17, 2019

Shilpy Sinha Mumbai

The liquidity squeeze is being projected as a financial industry issue, but bond markets are telling a different story.

 

Fixed income investors perceive non-banking finance companies (NBFCs) as less of a problem than housing finance companies (HFCs), corporate bond data shows.

 

The cost of borrowing for AAA rated NBFCs declined by 13 basis points in May versus April in the debt market, while it increased by 19 basis points for AAA-rated HFCs, according to a report by CARE Ratings.

 

NBFCs have been witnessing higher cost of borrowings compared with all other categories, including Alternative Investment Funds and HFCs, since April 2018. The yields on corporate bonds and commercial paper have been on the rise following the stress in the NBFC sector from September 2018 and defaults by IL&FS.

 

Corporate bond yields have since moved down to 8.49% in May, from 9.8% in September. Similarly, commercial paper yields have moved lower to 7.48% in May from 7.72% in September.

 

“The easing of borrowing costs in the corporate bond market has been mainly on account of the rate cuts undertaken by the RBI and the possibility of further rate cuts,” said Madan Sabnavis, chief economist, CARE Ratings. “The decline in G-sec yields and easing of liquidity constraints in the banking system have also supported the decline in the corporate bond yields.”

 

Corporate bond yields in May were 13 basis points lower than the previous month and 131 bps lower than in September, when liquidity constraints peaked.

 

“With a policy rate cut, there has been a rally in rates, especially in top-notch rated NBFCs that’s across, as we see systemic liquidity also improving from a constant deficit to surplus in the last two weeks,” said Ajay Manglunia, managing director and head &ndash institutional fixed income, at JM Financial Products.

 

“There has been a lot of activity on the issuances side, with cost getting better, investors having many options and are choosing based on their perception and understanding of risk.”

 

Total CP issuances have increased to 337 in May from 16 in April. The CP issuances amounted to Rs 74,708 crore.

 

HFCs, which did not raise short term funds via commercial paper in April, raised Rs 8,900 crore &ndash 12% of the total issuances &ndash in May.