Bond investors’ appetite for risk on the rise

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Mumbai | Published: December 29, 2015 1:11:27 AM

There may not have been too many defaults on the bond market in 2015 — Amtek Auto was a big one — but the sharp jump in fund-raising by companies rated between AA and BBB...

tax reforms gst billWhile top-grade firms were able to pick up money at interest rates lower than in 2014, coupons on bonds rated below AAA rose from 16%-17% in June-July to 22% in October. (Thinkstock)

There may not have been too many defaults on the bond market in 2015 — Amtek Auto was a big one — but the sharp jump in fund-raising by companies rated between AA and BBB- during the year suggests investors are willing to take some calculated risks. Prime Database estimates such companies mopped up close to Rs 1.60 lakh crore this year, a jump of 25% over 2014. Interestingly, close to Rs 28,700 crore was mobilised at coupon rates of 13% and above; that’s twice the quantum mopped up at these rates in 2014.

While top-grade firms were able to pick up money at interest rates lower than in 2014, coupons on bonds rated below AAA rose from 16%-17% in June-July to 22% in October. On September 30, Jet Airways offered BB-rated NCDs worth nearly R700 crore at 20.64%, Bloomberg data shows. Companies that are rated below AA+ are paying anywhere between 8.75% and 22%, nearly 275-750 basis points more than they were in July.

Amtek Auto, which failed to pay back Rs 800 crore on time, was rated AA- or investment grade paper, as late as May this year; the default came in September. Nevertheless, the corporate bond market has been at its active best with Rs 4.2 lakh crore being picked up, a 14% rise over the previous year. Top-rated companies have taken advantage of lower interest rates in the bond markets to either refinance their existing loans or borrow afresh. To be sure, the bulk of the money raised has, at Rs 2.58 lakh crore, has been done so by companies in the top bracket; the increase over 2014, however, was just 7.5%. Most of these borrowers are financial institutions and public sector undertakings that frequently tap the corporate bond market.

But ratings of at least 70 companies have been downgraded by the three main rating agencies and nearly 100 companies — 20 listed and 76 unlisted — have been ascribed a ‘Default’ rating since April. Agencies say that at a time when the revenues are under pressure thanks to sluggish demand, a whole host of companies could be in trouble. Bankers say smaller companies are weighed down by weak cash flows since their receivables are piling up. The outlook for firms like BHEL, IPCA Lab, Bank of India, Indian Overseas Bank and Bank of Maharashtra were revised to ‘Negative’. According to Crisil, a ‘Negative’ outlook indicates that there is material likelihood — at least one in three — of the rating being downgraded over the medium term.

Crisil lowered the rating outlook for the long-term bank facilities of BHEL from ‘Stable’ to ‘Negative’ citing slow project execution, stretched working capital and vulnerable profitability. BHEL’s receivables, it said, continue to be sizeable with around a fifth of the receivables due from private sector developers who face delays in implementation besides shortfalls in project funding. Two of L&T’s road projects, some debt instruments of SREI Infra, and one expressway project of GMR have all seen lower creditworthiness.  Long-term instruments of eight companies including those of Jaypee Infratech and Jaiprakash Power ventures were downgraded from investment grade BBB- and for at least four they were brought down by two-notches. Jaiprakash Associates now carries a ‘D’ or default rating.In their defence rating agencies, who are seen as not being proactive enough, say they have been vigilant.

Anjan Ghosh, Chief Rating Officer, ICRA, points out that management quality, group strengths, expansion strategy as well as overall business prospects are considered while ascribing the rating, apart from the financials. Other executives at the agencies claim they do frequent reviews or stress tests. Of the 11 metals producers that saw rating downgrades, seven are steel producers of which four are now graded ‘D’. That more companies from the sector may witness credit downgrades is a given, say analysts as they see most steel producers reporting negative operating cash flows in FY16. In the three months to June 2016, every second large to medium sized steel producer reported a loss.

At least 10 firms which have market capitalisation of more than Rs 2,000 crore such as Vedanta, Hindalco, Jindal Steel and Power have been demoted although their ratings stayed at AA, AA- and AA- respectively.

Gr4

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