Corporate bonds defy general market interest rates in most part of 2019

16 January 2020 09:27 am - 0     - {{hitsCtrl.values.hits}}

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Although the broader interest rates trended downwards during most part of last year, the interest rates applicable on corporate bonds had moved in the opposite direction.


The interest rates of the corporate bond market, largely consisting of debentures and commercial papers, have increased by 75 basis points to 175 basis points, a close observation into such instruments by ICRA Lanka showed. 


“In contrast to lending rates, the interest rates applicable on commercial papers increased to a range of 14.85 percent to 16.25 percent, from a range of 13.10 percent to 15.00 percent recorded in the first eight months of the previous year. 


Furthermore, the interest rates applicable on debentures also increased to 12.88 percent-15.50 percent in the first nine months, from 12.00 percent-14.75 percent in the corresponding period in 2018,” said ICRA Lanka Research and Business Development Head Lalinda Sugathadasa in a research note. 


ICRA Lanka is a credit rating agency coming under Moody’s Investors Service, one of big three rating firms in the world. 


While Sugathadasa did not cite a specific reason for the contrasting behaviour in the corporate bond market rates, it is suspected of the lack of liquidity in the capital market and the absence of good rated instruments as reasons for the slightly higher risk premium sought by the investors in such assets. 


Banks and finance companies had been leading issuers of corporate debentures. But several such issuances ended up being undersubscribed last year. 


The latest of such case was the debenture issue by Softlogic Finance PLC.

During the last couple of years, billions of rupees were raised by banks, followed by licensed finance companies to meet the minimum capital requirements mandated by the Central Bank. But as of late, several such issuances fell out of favour with the investors, as the banks’ returns failed to justify the investments in them as their growth stalled and earnings narrowed. The situation with regards to finance companies was worse.  While the corporate debt instruments typically carry a slightly higher risk premium than the other investments, rising rates is unusual in an easing market. 


The Central Bank cut policy rates three times in 2019, to release liquidity to the market—first by cutting the Statutory Reserve Ratio by 100 basis points at the end of February and reducing policy corridor by overall 100 basis points in two subsequent instances, effectively lowering the short-term rates. 

 

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