Firms raise record debt making the most of low rates

• Corporates have raised whopping Rs.117bn between April 2020 and March 2021 via debt capital market
• Most corporates seen locking up funds at current historically low interest rates for next 5 to 7 years
• 1Q21 saw highest amount of corporate debt raised in last five years
• Insurance firms, mutual funds stepping forward to buy these instruments to increase their effective yields

A record amount of money has been raised by Sri Lankan companies as historically low interest rates have drawn them to the debt capital market, looking for the best deal in town with the aim of locking in low cost funds at least for the next five to seven years. 

According to the data parsed by the rating agency ICRA Lanka on the debt instruments issued, Sri Lankan corporates were estimated to have raised a mammoth Rs.117 billion in the 12 months from April 2020 through March 2021. This was despite the pandemic-induced market disruptions. 

Indicating the growing appetite for debt, the first quarter of the incumbent year saw the highest amount of debt raised in the last five years by way of publicly traded debt instruments, the rating agency said. 

“Large corporates and financial institutions are showing growing interest in issuing debt instruments and locking up their funding needs at the current low interest rates,” said ICRA Lanka in a new study carried out to find out the winners and the losers of the historically low interest rates. 

As most of these instruments carry a minimum of five to a maximum of seven-year tenors, the current yields offer a great opportunity to issuers to minimise their cost of capital for a relatively longer period.  

“On the demand side, insurance companies and mutual funds are stepping forward to buy these instruments to increase their effective yields to attract investors from other asset classes,” the rating agency noted.

 While the study’s focus is on corporate debt raised via corporate bonds and debentures, which are issued on the public exchange, the companies are also making sizeable borrowings from the banking sector too, as seen from the recent acceleration in private sector credit. 

Further, there are also companies which issue bonds and debentures privately where their data isn’t captured here. In addition, companies also issue commercial papers for their mostly short to medium term funding requirements, which are also raised privately.

For instance, according to data coming from commercial and specialised banks, the cumulative commercial paper issues rose from Rs.0.6 billion in January 2021 to Rs.1.1 billion in February 2021. 

Meanwhile, the total outstanding debt raised via commercial paper issues rose from Rs.2.7 billion in January 2021 to Rs.3.0 billion in February 2021.  

Mirror Business recently showed how Sri Lankan companies had gradually raised their leverage in the recent past making the most from declining interest rates. 

Low cost borrowings are functioning as one of the main factors in driving the earnings of these companies as they now pay less interest cost on their debt or a similar interest cost on a higher amount of debt which was raised to ratchet up their production capacity or to expand their businesses.