With tell-tale signs of interest rates firming up, corporates are rushing to lock in their new liabilities in fixed-rate instruments.
But there are not too many takers for fixed-rate paper in the market as investors feel the rates can only move up. This has left companies with very little choice but to go for floating-rate loans, or knock on the doors of banks for funds.
Housing Development Finance Corporation and National Hydro-Electric Power are among the few companies that are still raising funds through floating-rate instruments at the moment.
But Indian Hotels, Tata Motors, Reliance Energy, Rashtriya Chemicals and Fertiliser Corporation, Power Finance Corporation and Raymond are scouting in the market to raise funds through fixed-rate instruments.
Since there are not many takers, many companies have dropped plans to raise funds from the market. They are likely to opt for bank credit at a fixed rate. Indian Hotels, looking to raise Rs 150 crore (Rs billion), is eyeing a rate of 6.15 per cent per annum. Reliance Energy's proposed Rs 200 crore (Rs billion) issue was also looking for a fine rate, merchant bankers sources said.
Similarly, Tata Motors wanted to raise Rs 200 crore (Rs 2 billion) through a 10-year money at 6.4 per cent. However, the going rate for the 10-year paper of triple A-rated corporates now is 6.5-6.75 per cent.
Corporate funding is become expensive and India Inc is feeling the pinch. "There is a strong interest among corporates to raise funds as they seek to lock in their liabilities at yesterday's rates today," said Centrum Finance Managing Director R Krishnamurthy.
Liquidity is not an issue, but lenders are apprehensive as interest rates are seen to be hardening. The yield on the benchmark 10-year paper is currently ruling at a 14-month high of 5.48-9 per cent. The last time this paper was ruling at these levels was in March 2003.
Housing finance major HDFC is raising Rs 400 crore (Rs 4 billion) through a seven-year paper at 70 basis points above the Reuters' Indian benchmark (INBMK) rate for a one-year paper.
This brings the effective rate to 5.20 per cent. Similarly, NHP proposes to raise Rs 500 crore (Rs 5 billion) at 60 basis points above INBMK.
HDFC had wanted to raise funds at a fixed interest rate in keeping with prevailing secondary market yields of 6.05 to 6.1 per cent. However, investors were willing to buy a fixed rate paper only at 6.25 per cent.
HDFC's floater, opening on Monday, is managed by IDBI Capital Markets, DSP Merrill Lynch and Standard Chartered Bank.
"Considering the direction of interest rates, as an investor, I will prefer floating rate instruments. Corporates will have to adjust to higher interest rates, or opt for floaters," said UTI Bank Treasury Head Partha Mukherjee.
Issuers are not comfortable raising funds through floating instruments as they are not sure of their future liabilities in the event of interest rates moving up. The market expects the underlying benchmark rate, INBMK, to go up by 50 basis points, which explains why investors are willing to offer lower rates on floaters.
