MUMBAI: Companies will continue to tap corporate bond market to raise funds despite dips in bank loan rates with ICRA , a rating company, expecting 20-22% rise in corporate bond sales next financial year.“Growth of corporate bond issuance is estimated to remain substantial at 20-22% in FY2018, with gross issuance rising to Rs 8.5 trillion (lakh crore), which may exert pressure on spreads vis a vis G-Sec,” said ICRA in a report, released on Tuesday.With banks cutting rates based on marginal costs of funds, the spread or gap between loan and corporate bond markets has narrowed. In turn, this led to a market speculation that companies, which were increasingly selling bonds to raise cheap money, would now shift to bank loans.“AAA (top-rated) corporate bond yields are around 10 bps higher than the pre-note ban level. While ICRA expects bond yields may soften from current levels in the event of a rate cut, higher supply of SDL and corporate bonds may widen their spreads relative to G-sec”, Karthik Srinivasan, Group-Head-Financial Sector Ratings, ICRA.Companies try to meet their long term capital needs through corporate bond market, which offers reasonable borrowing rate with higher size.However, bank loans help them meet their working capital/short term credit requirements.ICRA expects gross bond issuance via government of India securities (G-sec), state development loans (bonds sold by state government), UDAY bonds and municipal debt to remain stagnant at Rs. 10.7 trillion in FY2018.Although the 10-year G-sec yield has reverted to the level seen before the note ban, SDL (state bond) yields are now 20 bps higher than the level recorded in the auction on November 8, 2016, following the announcement in mid-January 2017 of the exclusion of most states from utilising National Small Savings Fund (NSSF) inflows to fund their fiscal deficits, said Srinivasan.Urban local bodies, according to ICRA, are expected to make a cautious re-entry into the bond markets, with municipal bond issuance expected to remain under Rs. 0.2 trillion, to fund their share of projects under Smart Cities and Amrut.

Source: Economic Times February 21, 2017 13:52 UTC