Lack of liquidity was one of the root causes for corporates barring the top-rated ones, for not having enough funding access and surely NBFCs were the most affected lot, but this scenario has improved now.
By Shashank Nayar
A lot of ‘scavenging opportunity’ with respect to earning a higher coupon is present, as fear of defaults has led a lot of players to shun even the good names in the NBFC sector, Lakshmi Iyer, CIO-Debt, Kotak AMC, tells Shashank Nayar. Excerpts:
Kotak AMC had an exposure of Rs 135 crore as of May 2019 to the debt papers issued by DHFL. Could you throw light on the resolution process as reports suggest banks have asked MFs having unsecured exposure to take a haircut?
I don’t think banks are asking mutual funds (MFs) to take a haircut, but based on the entire process it is still a little opaque as mutual funds are not lenders but investors, so it is still unclear as to the role of MFs in the resolution process. With respect to DHFL, all mutual funds combined have an exposure of only Rs 4,000 crore out of the total debt of Rs 70,000 crore; rest of the exposure are with banks, and this is a first-time situation where banks and mutual funds collectively having an exposure to a housing finance company (HFC), which has been downgraded to default due to non-payment of debt. All our investments in DHFL are in secured debentures.
On the onset of the series of defaults and downgrades of NBFC and HFCs, what is the risk perception of mutual funds investing in these sectors as of now?
Lack of liquidity was one of the root causes for corporates barring the top-rated ones, for not having enough funding access and surely NBFCs were the most affected lot, but this scenario has improved now. Kotak as a mutual fund never stopped lending to NBFCs, though we continued to lend to high-grade NBFCs largely even after the IL&FS crisis in September, and even now we buy papers of the cherry picked companies that are there in our portfolio.
This market, as of now, is giving us a lot of scavenging opportunity because there is so much fear in the market, which is leading people to shy away even from good names based on fear of default, which is not the case. Although we have made some tweaks with respect to reducing the percentage of our exposure in certain companies, but the lending has not stopped.
Even after the government is keen that companies increase borrowing from the bond markets, corporate bond issuances continue to go down, when will the appetite return?
When there is supply happening there needs to be adequate demand for it too, but it is the high-grade bonds that are only finding enough takers. For example, quasi-sovereign companies are finding buyers and select AAA-rated private players are receiving good demand for their issuances. However, the moment you come down a notch in ratings, even if the company has a strong management, the demand for lower-rated corporates have totally vanished as mutual funds, which are one of the largest buyers of these papers are receiving money predominantly into short-term strategies where demand is for short maturity hogs grade instruments instead of long-term instruments like non-convertible debentures (NCDs). Hence there is little euphoria from the supply side.
The corporate bond spread for NBFCs continues to widen even as both government yields and corporate bond yields continue to decline. With every government bond yield rally, the corporate bond spreads have widened and there are two reasons for it. One is the NBFC crisis is not completely behind us, while bulk of the carnage is behind, the small pain points still remain to be resolved. Secondly, with less money chasing the corporate bond market the spreads are not in a hurry to narrow down. So, G-sec yields needs to stabilise which currently is in a bullish and euphoric mode. While corporate bond yields have also come down they haven’t come down with the same gusto as g-secs hence the widening of spreads. However, for top-rated NBFCs, the rate at which they raise money has come down this month, but spreads remain elevated.