Investors demand higher returns on corporate bonds

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Mumbai | Published: November 23, 2015 1:04:14 AM

Despite the recent default by Amtek Auto, which failed to pay bond holders on the due date, investors aren't really staying away from the corporate bond market.

BSE SensexMarket watchers confirm the caution among buyers is resulting in a preference for higher-rated corporate bonds. (Express Photo)

Despite the recent default by Amtek Auto, which failed to pay bond holders on the due date, investors aren’t really staying away from the corporate bond market. To be sure they’re asking for more to compensate for what could be ‘perceived’ higher risk. That’s evident from the fairly sharp rise in yields on corporate bonds, that don’t command a top quality rating. But they’re buying nevertheless.

Data compiled by FE shows that the highest coupon, on bonds rated below AAA, has moved up from 16%-17% in June-July to 22% in October. On September 30, Jet Airways offered BB rated NCDs worth Rs 698.9 crore at a coupon rate of 20.64% Bloomberg data shows. Companies that are rated below AA+ are now paying anywhere between 8.75% and 22%, nearly 275-750 basis points more than they were in July. The proportion of bonds rated below AAA rating has moved down from 50% in June to 21% in October.

Companies that command strong credit ratings, however, continue to tap the bond markets given the widening difference between interest rates that banks charge and the underlying yields in the debt market. Bloomberg data shows companies, rated AAA, have on average mopped up  around Rs 19,400 crore in each of the the last three months.

Gr6

The coupon on AA- rated issuances, rated by CARE, has risen from 9.4% in July to above 10% in October. Future Retail raised about Rs 870 crore from the bond market in five tranches offering investors between 10.1% and 10.25%.

Religare Finvest and Karelidas Traders issued AA- rated bonds, with maturities of between three to six years, at coupon rates of 10.68% and 11.75%, respectively. These instruments were rated by ICRA.  October saw 63 transactions in long-term securities—non convertible debentures— rated below AAA worth close to Rs 7,029 crore. That compares with Rs 11, 336 crore in August and Rs 13,777 crore in June.

Market watchers confirm the caution among buyers is resulting in a preference for higher-rated corporate bonds. Rakesh Valecha, Head – credit & market research at India Ratings, observes that while investors continue to favour corporate bonds with ratings close to AAA,  they have turned cautious about buying bonds rated below AA-.

“The appetite for such bonds has clearly reduced and yields on issuances have also inched up,” Valecha confirmed adding that investors are more inclined towards the top end of issuances given these are primarily from banks, financial institutions and public sector undertakings.

Dwijendra Srivastava, CIO-fixed income, Sundaram Mutual Fund, confirms yields have gone up by 20 to 30 basis points (bps). Nevertheless,  mutual fund schemes that are mandated to invest in these bonds haven’t really pared their exposure although they’re extra cautious on prudential limits relating to a borrower.  However, no fund has altogether discarded bonds with lower ratings; even companies that are rated ‘A’ and above are able to find takers if their cash-flows are seen to be steady and sustainable. Several fund houses which held paper, that has been downgraded in recent months, are trying to sell them.

Yields have also widened to factor in risks associated with the relatively limited legal room available to mutual funds and insurance companies to recover their dues in the event of a default. Harshad Patil, CIO, Tata AIA Life Insurance points out insurance companies are not big buyers of lower- rated bonds given the mandate which requires them to invest 75% of their debt corpus in AAA bonds and government securities. “We also have a cap of 10% on investments in a single corporate issuance,”added Patil.

Asset management companies are also according a higher weightage to the track record of the promoters, given the stress in corporate India. The default by Amket has taught them how important the quality of management and the size of the balance sheet can be at a tme when the economy is in the midst of a slowdown. If activity in the corporate bond market remains high— close to Rs 2.9 lakh crore has been raised between April and October—a fair share has been raised by public sector companies.

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