Decade-High Spreads on Longer India Bonds Flash Concerns
Spreads on longer rupee corporate notes have widened to the most since 2009.
(Bloomberg) -- Corporate bond investors in India are signaling mounting concern about borrower credit risks as the nation’s economy staggers under a protracted coronavirus lockdown.
That may put more pressure on the Reserve Bank of India to offer additional support to companies, even after recently cutting its key benchmark interest rate to the lowest since it was introduced in 2000. Spreads on longer rupee corporate notes have widened to the most since 2009 despite the move, as investors reduce risk.
The surge in yield premiums for longer bonds makes it costlier for infrastructure builders and their financiers to access funds required to revive investment, and give the economy a boost when it needs it the most. India’s economy will likely contract this year for the first time in more than four decades, according to the central bank, due to measures to contain the coronavirus.
Some investors are already calling for the central bank to step in and purchase longer debt directly to bring down borrowing costs.
“The long-term corporate bond spreads show that investors have turned extremely cautious and are avoiding credit risks during the pandemic,” said Anshu Kapoor, head for private wealth management at Edelweiss Financial Services. The RBI should set up a special-purpose vehicle to purchase longer bonds because yield premiums at current levels aren’t sustainable, he said.
With some economists forecasting the India economy to contract by as much as 5% in 2020, corporate bond investors are largely playing it safe, sticking to the highest-rated notes and shorter tenors, where spreads have fallen. RBI measures, including additional liquidity injections, have had the most effect on the short end of the curve, where borrowers are now concentrating issuance.
“A large proportion of short-term debt instruments in the overall debt mix will lead to asset-liability mismatch issues and refinancing risks for the issuers,” said Somasekhar Vemuri, a senior director at Crisil Ratings.
Some state-backed borrowers, however, have already withdrawn planned issuances of longer maturities because of unfavorable pricing. For India’s economy to really bounce back, steps to tame spreads there will be crucial.
“Long-tenor bonds are key to funding companies’ and the country’s long-term projects,” said Mahendra Jajoo, chief investment officer for fixed income at Mirae Asset Investment Managers India Pvt. “Demand for such bonds will remain low as there is no certainty about how long it will take for companies to recover from the pandemic hit, putting long-term expenditures on hold.”
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