The Hindu Business Line : Insurance cos lap up corporate bond issues

New issues
At least Rs 5,000 crore of new bond issues have been lined up for the month. These include big ticket issuers such as Tata Motors and Tata Steel with issue sizes of Rs 1,200 crore and Rs 1,500 crore priced at 10 per cent and 11 per cent respectively.

C. Shivkumar

Bangalore, May 11 With banks yet to reduce interest rates, public sector entities and private corporates have begun rushing to the corporate bond markets.

Bankers said the funds raised, at least Rs 13,000 crore, was through bond issuances since the beginning of the current financial year. Most of the issues were picked up by life insurance companies, non-life insurance companies and to some extent by mutual funds.

Life insurers’ interest in corporate bonds largely stemmed from the high yields offered. For instance, Triple “A” SAIL bond issue for Rs 1,000 crore offered a yield of 8.9 per cent, for ten years. This was about 250 basis points more than the sovereign yield prevailing at that point of time.

But insurers, the bankers said, were also developing an appetite for private sector corporate bond issues. In fact, most of the insurers were restricting their exposures in the equity markets and focusing more on the fixed income securities markets, taking advantage of the current high yields.

Prefer long-term issues

Life insurers’ preference was mostly for long-term bond issues. This allowed them to drive hard bargains, implying that no early exit options were allowed before ten years.

Life insurers’ preference for long-term bond issues was in view of the long tenure of their liabilities. As a result, most of the recent long dated project funding requirements was met from the insurers picking up bond issues. Public sector NTPC bond issue for Rs 700 crore last month was picked up almost entirely by life insurers, the bulk of it by the Life Insurance Corporation of India.

Short tenure bond issues were mostly taken by general insurers and mutual funds. General insurers’ interest in the corporate bonds were partly triggered by sinking mean yields. The ten-year Yield to Maturity at 6.13 per cent, implied a sharp fall in non-life insurers’ mean yields, from last year’s average of about 10 per cent. Besides, insurers that had in the past invested in Certificate of Deposits are also shifting to corporate bonds.

CDs currently offer yields of less than 4.75 per cent currently. Short term corporate bonds offered higher yields, evident from the pricing of the Power Finance Corporation’s five year issue for Rs 1,000 crore.

The five-year issue was priced at 7.5 per cent or 150 basis points more than identical sovereign papers.

Insurer interest, as a result, has triggered a scramble among some of the large corporate fundraisers. At least Rs 5,000 crore of new bond issues have been lined up for the month. These include big ticket issuers such as Tata Motors and Tata Steel with issue sizes of Rs 1,200 crore and Rs 1,500 crore priced at 10 per cent and 11 per cent respectively. Even at these high prices, the banking sources said that the funds would be finer than bank funds, by at least 100 basis points.

The shift to bond markets was also partly triggered by the continued credit risk aversion among public sector banks. The risk aversion was evident from the high recourse to the reverse repurchase window.

At the three-day weekend liquidity adjustment facility, recourse to the reverse repurchase window amounted to Rs 1.40 lakh crore. Even among banks that were prepared to lend, pricing was still an issue. The sources said that though bank funds were offered at discounts to BPLR, theactual lending rates were as high as 11.75 and 12 per cent.

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