Credit blues: Rate hike squeezes corporate borrowers

Many economists expect further rate increases, raising the prospect of more pain with more than half of India's top 500 companies carrying short term debt in excess of the cash on their books.

Mumbai: The surprise interest rate hike has disrupted plans of bond issuers such as Power Finance Corp, while seekers of short-term funds still face high borrowing rates despite the Reserve Bank of India's (RBI) reduction in the overnight rate.

RBI Governor Raghuram Rajan's quest to stamp out inflation helped send bond yields up by as much as 71 bps and made already-scarce funding even tighter at a time when many corporates are struggling with shrinking profits and an economy growing at its slowest in a decade.

Many economists expect further rate increases, raising the prospect of more pain with more than half of India's top 500 companies carrying short term debt in excess of the cash on their books, according to Reuters' calculations.

State-run Power Finance Corp, a frequent issuer that kept to the sidelines for three months as market rates surged, had planned to raise up to 25 billion rupees immediately after Friday's RBI policy review, in anticipation that funding would become cheaper, bankers said.

Instead, PFC postponed the issue to Monday, but weak demand and higher rates forced it to try again on Tuesday, when it managed to raise 16 billion rupees in a private placement of three-year funds at 9.80 percent, higher than the 9.75 percent quoted to the firm on Monday, bankers said.

The company, whose last issue was on June 19, when it raised 43 billion rupees through a sale of 2-year bonds at 8.29 percent and 3-year bonds at 8.27 percent, declined to comment.

While raising its policy rate on Friday, the RBI also cut the marginal standing facility, an overnight rate, by 75 bps to partly unwind a 200 bps hike made in July as part of an emergency support package for a beleaguered rupee.

But the reduction in the overnight rate has not significantly eased short-term borrowing costs.

India's one-year CD rate was 9.74 percent at Tuesday's close, 3 basis points below the pre-policy level on Thursday, while the three-month CD rate was 9.79 percent, down 11 basis points, according to Reuters data.

"The cut in the MSF was not reflected in short-term papers because the market is not confident about the liquidity conditions and is factoring in regulatory risk," said Ashish Jalan, a fixed-income fund manager at SPA Securities.

Banks typically roll over short term debt at the end of the quarter, which is also keeping rates high.

Already, domestic bond issuance in July and August was down by 65 percent from a year ago to 208.74 billion rupees, according to Prime Database. The sharp rise in bond funding costs due to the rupee support measures taken in mid-July had sent borrowers to banks instead.

Many Indian companies, meanwhile, are under stress. In the fiscal year that ended in March, corporate defaults hit a decade high 4.5 percent, Fitch Group's India Ratings & Research said in a report on Tuesday.

In a report issued two months ago, Fitch said the cash generating and debt servicing ability of the top 500 Indian companies was the weakest since 2008, with 64 percent showing a decline in fund flow margins since 2012.

Big investors such as pension funds have stayed away from lending to companies and are instead parking funds in banks, which offer over 10 percent for 2-3 year funds to bulk depositors. Mutual funds, meanwhile, are holding onto cash.

"We're in an environment where liquidity has dried up and quickly falling debt prices have made investors cautious," said Naveen Sharma, a fund manager at Bajaj Allianz Life Insurance.

"We are staying away from lower credits, and good firms can access bank funding," which is cheaper, he said.

Market participants said the spike in rates and volatility will keep even frequent corporate issuers out of the market.

Rural Electrification Corp, another state lender, had been in talks with bankers for a bond issue but has decided to wait until October, bankers said, and will instead look to raise one-year commercial paper. REC declined to comment.