Sustained easy money alongside improving risk appetite, as signified by the trend of overall rising number of issuances in the primary Commercial Paper (CP) market, coupled with healthy volumes in the second quarter (2Q) of FY22, requires close monitoring, according to India Ratings (Ind-Ra).
The credit rating agency has noticed certain instances of risks building up in relation to high-rated corporates raising short-term debt to take arbitrage opportunities because of low rates in the CP market.
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The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions, said Nikhil Changulani, Analyst, Ind-Ra, in a report.
The agency observed that a few large corporates, who have access to CPs at the cheapest cost (sub 4 per cent), are using arbitrage opportunities by increasing the use of CPs and enhanced drawings from some banks, thus opening up risks in the system.
Ind-Ra believes the risks to be presently limited to a few cases; but if not addressed could accentuate and spread to the wider baskets.
CP: market resilient in 2QFY22
Changulani noted that the CP market trend suggests that the market has shown resilience during 2QFY22 amid the uncertain period of the second wave of Covid-19.
“The overall rising number of issuances in the primary CP market coupled with healthy volumes has been the trend. Moreover, the rising number of issuers in a month suggests broadening of the market although there is a concentration risk pertaining to the tenor of borrowings.
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“The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions,” the analyst said.
In September 2021, the number of unique issuers in the corporate and finance segments increased to 74 (69 in August 2021) and 65 (60), respectively. The corporate issuers mopped up ₹73,900 crore (₹60,100 crore) while the finance issuers raised ₹42,900 crore (₹1,07,700 crore).
While the money market rates have remained historically low as a result of favourable environment and assurance from the RBI regarding loose policy stance, Changulani underscored the modest hardening in rates that was visible in October 2021.
Ind-Ra believes a sustained rise in commodity prices worldwide and looming supply-side shortage in various spectrums could pose challenge to the short-term rates.
The report said corporates are emerging from the second wave of Covid-19 and are tapping the CP market positively in anticipation of higher working capital requirement, owing to the high commodity prices coupled with a recovery in capacity utilisation.
IPO financing
The agency underscored that the concentration of issuances in the seven-day bucket is largely due to the initial public offer (IPO) financing in the equity market. On the other hand, three-to-four-month bucket mirrors the nature and origination of fund flows to mutual funds.
Non-banking financial companies (NBFCs) have been gaining the advantage of the excess liquidity and a favourable environment for tapping CP markets to raise short-term debt for financing IPOs, Ind-Ra said.
The months of June, July and August 2021 witnessed heavy activities in the IPO market and many NBFCs were active in funding IPOs.
NBFCs raised ₹59,200 crore in June 2021, ₹1,41,200 crore in July 2021, and ₹1,07,700 crore in August 2021 via CPs.
The agency believes the RBI’s capping of individual borrower’s limit for NBFCs to ₹1 crore for IPO financing would affect the oversubscription of IPOs and reduce CP issuances.
Ind-Ra opined that the spread between banks’ marginal cost of funds-based lending rate and CP rate could remain wide. However, the shorter end of the market rate could start inching up in 3QFY22 based on the expectation (of unwinding ultra-loose monetary policy) from the RBI.
Nevertheless, the wide gap between CP rates and marginal cost of funds-based lending rate will remain a driving factor for more traction by the issuers to tap the CP market in the near to medium term, the agency said.