SHIFT TO BASE RATE INCREASES POPULARITY OF CPS

Yields on commercial paper have touched a one-year high with most issues by top corporates placing three-month debt at a range of 7.60-8 %. Smaller corporates are able to raise funds only at yields of 7.80-8.25% and the highest rated one-year CPs now yields around 8.25-8 .75%.

One of the outcomes of the banking system shifting to base rates was the rise in popularity of commercial papers. CP issuances also got a boost because of regulatory prohibition on bonds with daily put call options.

“CP rates are trading at their peak levels now. Around May, markets had expected rates to hover around 6-7 % for the first half of the fiscal. But with the shrinking liquidity and RBI raising policy rates, CPs have become an obvious choice for corporates seeking to raise shortterm capital,” said G Tadas, managing director and CEO of IDBI Gilts.

With effect from July, RBI has said banks cannot lend below the base rate — the new lending benchmark. As a result, corporates who want to raise funds below the Base Rate, have little choice but to issue commercial paper.

According to latest RBI data, outstanding investments in commercial paper stood at Rs 1,06,580 crore as on June 15 against Rs 92,363 crore in January. The yields at which these CPs have been issued have also risen.

The upper range for CP yields has also risen from 7.55% in January to 8.65% in June. With most treasury heads expecting another round of rate hikes by RBI, many corporates are rushing to raise funds even at current rates expecting rates to firm up further.

However, Ashish Nigam, head fixed income of Religare Mutual Fund says, there is a prevailing demand and supply gap.

“Mutual funds being the largest subscribers, incremental demand for commercial papers from MFs has been muted. There has been a surge in the supply after the base rates came into place. Especially since the corporates had no other means to raise shortterm funds, after the abolition of DPCs and the liquidity supply remained tight, there has been pressure on the short end.” 

The explosion seen in the rates of high credit quality commercial papers is likely to sustain on the higher ends, as liquidity pressures push up yields on the paper, even as the corporates get used to the base rates and look towards commercial papers to meet their short-term capital requirement.

Source: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/Shift-to-base-rate-increases-popularity-of-CPs/articleshow/6328985.cms