Kerala’s borrowing cost declines substantially

10yr bonds sold at 6.63 pc against 7.91 pc 6 weeks ago

MUMBAI: Tables have turned in favour of Kerala Government on Tuesday (May 19) as its borrowing cost for Rs500 crore 10-year-tenure bond or state development loans (SDLs) declined by 128 basis points (1.28 percentage points) in a matter of six weeks.

While the Rs500 crore SDL was priced at 6.63 per cent at Tuesday’s auction (May 19), the state had to pay 7.91 per cent to strike the deal on April 7 to raise Rs2000 crore with similar tenure.

Kerala raised Rs1500 crore on Tuesday (May 19)through three SDLs of Rs500 crore each with respective tenures of 5 years, 7.5 years and 10 years at coupon of 5.9 per cent, 6.5 per cent and 6.63 per cent (as earlier mentioned) respectively.

As per records, the government of India securities G-Sec has yielded about 5.85 per cent as of Tuesday, meaning that Kerala paper traded at around 78 bps premium to similar G Sec – indeed a far cry from that prevailed six weeks ago at around 150 basis points.

The first market borrowing in the current financial year, on April 7, had annoyed the state Finance Minister Dr Thomas Isaac as the investors in the bond, mostly banks (banks and insurance companies generally invest in these bonds) forced the state to pay through the nose, when Kerala sought to raise Rs6000 crore through three SDLs equally divided among three tenures – 10-year at 7.91 per cent, 12-year at 8.1 per cent and 15-year at 8.96 per cent as the SDLs went under hammer.

The most disheartening part of the story, which has yet not been discussed in the public domain, is that despite the high coupon the 15-year paper offered to the investors, the state had failed in the auction to drum up sufficient interest leaving the state to fold up that SDL, falling short of Rs70 crore, closing the book at Rs1930 crore.

Dr Isaac, a proponent of borrow-and-invest, as always he is, though had proclaimed at the outset of the financial year itself that he would frontload the current year’s market borrowing as far as possible in the first month itself, had to retract his plans and go slow on the borrowing schedules in terms of amount as well as tenure.

The ensuing bonds were of much shorter tenures and smaller amounts.

Talking to, Baiju Swami, an expert on financial markets, said today the banks are hunting for avenues to park their surplus funds safely leaving aside their craving for returns for the time being.

“Almost Rs8.5 trillion remain parked with RBI at one of the lowest reverse repo rates in the recent history, at 3.75 per cent and this has helped the states in hammering down the coupon for their papers (SDLs), which in turn enjoy implicit sovereign guarantee,” he said adding that these banks currently sit on G-Secs in far excess of their regulatory requirements.

The liquidity is not an issue in question now for the banks after the two TLTROs flooded the system with funds and the reverse repo ruling at one of the lowest in recent history.

In fact, the LTRO issue on April 23, targeted to help the low rated NBFCs and MFIs couldn’t garner enough takers leaving the issue just half subscribed by banks.

Covid-19 crisis is fuelling risk aversion in the markets, especially in the debt market. Everybody wants to play it safe.

Talking to this portal from Mumbai, Vikram Dalal, managing director, Synergee Capital Services, which specialises in fixed income products, said there are buyers only for top-rated papers and government bonds, which obviously works in favour of state bonds.

“Nobody wants to buy lower-rated papers for higher yields because they know they won’t be able to sell them if they want to raise money immediately,” Dalal added.




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