Lower-Rated NBFCs Get Some Love From The Bond Markets Once Again

Data from the BSE Ltd. and National Stock Exchange of India Ltd. shows that even though overall primary issuance via exchanges has remained below levels seen pre-Covid, the quantum and proportion of bonds issued by AA-rated entities, including NBFCs, have risen.

For instance, in January this year, Rs 74,400 crore in bonds were issued via exchanges. Of this, about 10%, or nearly Rs 8,000 crore, were issued by companies with a credit rating of AA and below. In June, of the Rs 55,117 crore of bonds issued, the proportion of bonds rated AA and below increased to Rs 12,395 crore, or 23% of total bond issuance.

The Return Of Lower-Rated NBFCs

Moreover, the share of NBFCs in bonds raised by companies rated AA and below has risen.

Of the Rs 12,400 crore in such bonds issued in June, NBFCs made up around 52%, or Rs 6,475 worth of bonds. This is 70% higher than last month and 30% higher than February before the Covid crisis hit.

“Earlier there was some reasonable comfort with AA companies but due to outflows in credit risk funds, there was lower buying interest. Both banks and mutual funds are opening up and the appetite is steadily coming back, especially up to three-year bucket,” said Lakshmi Iyer, chief investment officer–debt and head of products at Kotak Asset Management Company. Investor flows are gravitating towards short- and medium-term funds and because of a lack of liquidity in lower-rated assets, there is little appetite for very long bonds of such issuers, she said.

The last three months have been tough for NBFCs as the Covid crisis worsened the troubles these lenders have faced for the past two years.

The RBI’s long-term repo operations worth Rs 1 lakh crore benefited the highest-rated firms first and a second round of targeted LTRO aimed at NBFCs was only partially utilised. However, the RBI’s liquidity operations have helped calm markets and outflows from credit funds have slowed, allowing for a pick-up in demand for NBFC debt.

Around 10-15% of the money going to lower-rated NBFCs is from capital market players, while the larger portion of the bonds being issued are being picked up by the banks' through their TLTRO funds, said Devang Shah, deputy head fixed income, Axis Mutual Fund.

“Post the lockdown, we saw a selloff in the bond markets which has now been reversed by the RBI's measures. Incrementally, the redemption pressure for credit funds has reduced and therefore, liquidity pressures have eased-off and the risk-aversion has come down,” he said.

Credit Spreads Remain High

To be sure, the borrowing cost for many of these NBFCs remains high.

Credit spreads, or the additional interest charged over government bonds, have not fallen sharply. Despite this, NBFCs are selectively tapping the market.

According to a debt fund manager, who spoke on the condition of anonymity, certain companies may have utilised their existing bank lines so they have to access capital market as banks may not be willing to lend. The choice for some entities is between bank lending rates and corporate bond yields and the availability of liquidity in each segment. The corporate bond market may be more attractive in terms of the spread and ability to easily access capital, this person said.

According to Shah, "only once we see a revival in economic activity and the credit cycle improving will spreads for lower-rated entities fall".

“Issuers have to bear the cost of higher spreads and in the near term it will remain elevated for lower-rated small players, at 150-250 basis points for AA-rated entities and 250-350 bps for A-rated entities,” he said.