Short-term credit for cos turns dearer
Short-term credit for corporates just got costlier. Companies are now prepared to shell out more than 8% as a return on their commercial paper (CP) issuances for a maturity period of 90 days.
By Preeti R Iyer, TNN |
MUMBAI: Short-term credit for corporates just got costlier. Companies are now prepared to shell out more than 8% as a return on their commercial paper (CP) issuances for a maturity period of 90 days. Interestingly, the rates offered on similar issuances, but with a longer tenure of 180 days, are lesser than 7.5%.
The past week also witnessed a narrowing down in the difference between the yield on the 91-day treasury bills and those on the 182-day and 364-day t-bills. In fact, while the yield on the 91-day t-bill has risen to 6.44%, there has been a decline in the yield on both the 182-day and 364-day t-bills to 6.74% and 7.02%, respectively. This means that while short-term credit is getting dearer, yields on long-term funds are easing.
A CP is a short-term, unsecured, negotiable promissory note with a fixed maturity. It is issued by companies at a discount to the face value and redeemed at a face value. Typically, corporates have been observed to be offering a yield in the range of 6.75-7% for a 90-day CP issuance, while the rate offered on issuances having a tenor of one year has been hovering around 8%.
The rates on the three-month deposit rates on the interbank market have also risen to the 7.3% levels, said treasury officials. The yield on a one-year certificate-of-deposit programme issued by a bank currently hovers around 7.9-8.05%.
L&T Finance, for instance, now offers a rate of 8.1% on a commercial paper issuance to raise Rs 25 crore over a three-month period. As against this, the yield offered on a CP issue worth Rs 25 crore over a one-year time span is only 8.19%.
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In April, ’06, L&T Finance offered a 7.37% yield on a 182-day CP programme to raise a similar amount of funds. Harihar Krishnamurthy, head-treasury, Development Credit Bank, said, “Long-term rates are now seen to converge with short term yields. Investors have the other attractive alternatives of parking their surplus funds such as mutual fund schemes, offering a return of around 7%. Hence, corporates have no option but to align the rates offered on the CP issuances in line with other industry benchmarks. The other option of resorting to term loans does not seem feasible as companies would then have to shell out a higher interest rate of around 9.5 to 10.5%.”
Treasury officials added that with there being considerable speculation of a second rate hike by the central bank, investors are also demanding an additional premium against future risks. Commercial banks raise certificates of deposits, while corporates use CPs to meet their short-term fund requirements.
Banks are increasingly taking to the CD route to raise fresh deposits as credit off-take is expected to supercede the growth in deposits, especially in the months of September-October when banks begin disbursing sanctioned infrastructure credit. On the other hand, issuances in the CP market have been quite lack-lustre for some time now.
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