Amid defaults, corporate bond markets brace for ₹5 trillion refinancing2 min read . Updated: 04 Jul 2019, 12:51 AM IST
- Non-bank lenders will continue to get the brush off from investors
- Mutual funds have already been asked to tone down their bond investments
MUMBAI : Are you an AAA-rated issuer? You can now only get a toehold at the investor’s table for your corporate bond.
Gone are the days when AAA-rated meant a walk towards the cabin of the investor and walking away with the money.
Spare a thought then for issuers with lower ratings.
The aversion towards corporate bond issuers, which was triggered by the defaults by AAA-rated Infrastructure Leasing and Financial Services Ltd and Dewan Housing Finance Corp. Ltd, has only deepened now.
The reason: Debt repayment defaults by a travel service company and a textile firm. Cox and Kings Ltd had a rating of AA-, while Sintex Industries Ltd was rated AA+ by CARE Ratings. These have now been downgraded to the default category.
Now, bond arrangers and analysts believe that the aversion to refinance debt or roll over maturing bonds would be felt for a few more quarters.
“We can clearly see illiquidity around, and refinancing will not easily be available for some more time—perhaps for three to six more months. Lots of investors in all categories have lost money, including in AAA-rated bonds, with uncertainty about debt resolution. Obviously, they have become risk-averse in the current environment," said Ajay Manglunia, managing director and head of institutional fixed income at JM Financial Products Ltd.
So, who all will face the cold shoulder?
Non-bank lenders will continue to get the brush-off from investors, especially those that have a large wholesale book and exposure to real estate developers. Firms with below AA rating are unlikely to be entertained.
Analysts at Jefferies India Pvt. Ltd, in a detailed report on refinance risk, noted that out of the about ₹32 trillion worth of corporate bonds outstanding, 16% will mature in FY20, of which ₹43,800 crore are BBB, or below rated, also called junk.
“Primary refinancing risk centres on ₹2 trillion of redemption in FY20," said the report. This does not price in further rating downgrades, which is what bond investors are jittery about.
The fact that a whistle-blower called out the head of one of the rating agencies for malpractices is making investors even more worried.
Trust is in huge deficit and a corporate bond market already starved of investors is now looking at losing some of them permanently.
Mutual funds have already been asked to tone down their bond investments; insurers and provident funds have become choosy, while banks are busy dealing with their own mess.
It is no wonder that issuance volume hardly grew in FY19 despite lower yields.
To be sure, the first quarter of FY20 is showing encouraging signs. But JM Financial’s Manglunia said that issuances would be subdued this year as well. “No one is chasing yields. People have realized that you need oxygen more than food to stay alive. Credit risk is a bigger problem than the price of the bond," he said.