Fund managers continue to be cautious about investing in debt paper that’s rated below AAA. Issuances of bonds that don’t carry a top-notch rating have slowed sharply in the last couple of months. Indeed, corporate bond market activity itself seems to have lost a bit of momentum.
Data show that in the last two months of 2015, money mopped up by companies with ratings below AAA dipped by 40% to Rs 5,055 crore. The pace appears to have slackened in January with just four companies hitting the market so far to raise a combined Rs 400 crore.
Federal Bank executive director Ashutosh Khajuria confirmed that volumes in the corporate bond market have been somewhat subdued, explaining that these are by and large a function of price. “Yields on bonds have been moving up partly because the yield on the sovereign too have risen,” Khajuria observed, adding that there has been more caution after the Amtek Auto episode.
The cost of raising funds — the coupon rate on such bonds — for the higher end of the credit profile has increased marginally.
Sandeep Bagla, associate director, Trust Group, pointed out that yields have hardened slightly following sales by mutual funds that needed to comply with a change in the portfolio norms. “Also, companies are reluctant
to raise money at what they feel are elevated rates, which is why volumes are also somewhat dull,” Bagla said.
While the private placement of corporate bonds touched a record Rs 4.76 lakh crore in 2015, at Rs 98,700 crore the fund-raising in the last quarter was 20% lower than that in the corresponding period of the previous year. Moreover, the share of lower-rated paper has dropped from 30% in September to 11% in December.
Yields offered by paper that’s rated lower remain on the higher side. For instance, companies rated BBB+ offered anywhere between 13% and 20% coupon rates for three- to 10-year instruments. Two months ago, similar-rated debt issuances with tenures of six years were offered at around 14% to 19%.
Market players point out that with base rates of banks having moved down by 30-35 basis points over the last three months or so, the gap between the yields on bonds and base rates has narrowed.
Lakshmi Iyer, chief investment officer (debt), Kotak Mutual Fund, says investors such as mutual funds haven’t been big buyers lately since their inflows too have been relatively subdued.
Association of Mutual Funds of India data show that income funds saw an outflow of Rs 25,875 crore in December 2015. This was the first outflow in three months from this category of schemes, which typically invest in a combination of long- and short-term government and corporate bonds.
Dwijendra Srivastava, CIO (fixed income), Sundaram Mutual Fund, observed that although there were no major pressure points, a change in consensus outlook on future rate cuts have kept the benchmark bond yields elevated.