New Delhi: Investors can now invest in mid-rated 'A' category corporate bonds as the metrics of these bonds have improved. This has opened a new avenue for savvy investors who are always scouting to diversify their investment portfolio.
A CRISIL Ratings study released on Tuesday said that it may be time to alter the balance in the Indian corporate bond market, which has been skewed towards ‘AAA’ and ‘AA’ rating categories for a long now, with the share of ‘A’ category rated bonds at a mere 4%.
There are many reasons for this. Firstly, the credit metrics of ‘CRISIL A’ category-rated corporates have improved substantially and are now on a par with those of ‘CRISIL AA’ category-rated corporates seven years ago. As a consequence, the default rates for ‘CRISIL A’ category-rated corporates have reduced over the past seven years.
Secondly, ‘A’ category-rated bonds also offer better risk-adjusted returns compared to their ‘AA’ counterparts. Investors generally avoid bond issuances below ‘AA’ category as they tend to club mid-rated issuances (including ‘BBB’ and ‘A’ category ratings) with ‘non-investment’ grade issuances. This could be attributed to the perception that the debt protection metrics of mid-rated corporates carry materially higher volatility and default risk.
Contrary to the perception, a recent CRISIL Ratings study of ‘mid-rated’ issuers indicates strong business growth and improved balance sheets have resulted in the strengthening of credit profiles of ‘CRISIL A’ category-rated issuers over the past seven years. Buoyant economic growth especially in the recent past, increasing industry consolidation towards the organised segment, continuous deleveraging, digital advancement, and prudent liquidity management practices adopted by the corporates have contributed to this improvement.
The improvement in the credit profile of ‘A’ category-rated corporates is evident in their strengthened debt protection metrics. Median interest coverage and median gearing of these entities were 9 times and 0.4 times, respectively, in fiscal 2023, which are better than levels seen among ‘AA’ category-rated players in 2017.
Gurpreet Chhatwal, Managing Director, CRISIL Ratings, said, “Default rates, too, have improved for ‘CRISIL A’ category rated corporates, with the three-year cumulative default rate declining from 1.9% during fiscals 2007- 2017 to 0.9% for fiscals 2013-2023. Besides steady improvement in debt protection metrics, enhanced credit discipline brought in by policy measures such as the Insolvency and Bankruptcy Code (IBC), and increased regulatory disclosures for listed companies have supported a steady decline in default rates.”
Having said that, the default rates for ‘CRISIL A’ category-rated corporates are marginally higher than their ‘CRISIL AA’ category counterparts. Even after adjusting for the marginally higher default risk, the risk-adjusted returns for the ‘A’ category-rated bonds have been considerably higher than ‘AA’ category-rated bonds by around 40-60 basis points over the past three years. Thus, there is a compelling case for altering the mix, thereby deepening the market, the CRISIL top executive said.
Gautam Shahi, Director, CRISIL Ratings, said “Deepening of the bond market will be a win-win for all. The inclusion of mid-rated bonds in investor portfolios will not only provide higher risk-adjusted returns but will also enable better portfolio diversification as ‘A’ category-rated corporates are spread across more industries than their higher-rated counterparts. Deepening of the bond market will also provide ‘A’ category rated corporates access to an alternative source of financing at competitive rates while gradually reducing the onus on banks and non-banking financial corporations(NBFCs) to fund them.”
Even so, investors remain concerned about the illiquidity issues that prevail in the bond market for mid-rated issuances. In response, the Securities and Exchange Board of India(SEBI) initiated confidence-building measures by launching the Corporate Debt Market Development Fund to address the issue of liquidity, especially in times of market dislocation.
Additionally, with the introduction of the IBC and debt resolution platforms of the Reserve Bank of India, losses given default outcomes have improved, especially for infrastructure assets.
Read More
