In This Issue:
- Editor’s Column – A Vibrant Non Institutional High Yield Market
- IDFs are being placed at attractive yields & spreads
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
A Vibrant Non Institutional High Yield Market
The Indian debt market is evolving rapidly and this evolution is enabling small and mid size borrowers to access the corporate bond market. Even a few years back, such borrowers would have been forced to go to banks for funding, making the process cumbersome and less cost effective. The bond market also forces the borrowers to be more transparent and makes them highly responsible in servicing their borrowings.
Search for Yields is driving a class of investors including AIFs, PMS, Family Offices, HNIs and even Private Equity to the non institutional high yield market. There is active demand for bonds rated anywhere from BB to A that are issued by small and mid size companies, largely lenders. Yields on these bonds range from 10% to 14%, and given the demand, yields have fallen over the last one year.
The non institutional high yield market is largely agnostic to the movements in government bond yields. Hence despite the sharp rise in government bond yields by over 150bps from lows, yields in the non institutional high yield market have actually come down. The reason is the market moves on absolute levels of yields and not the spreads at which they trade over the government bonds.
The issuers are primarily lenders, ranging from mobile financing to unsecured lending to very small businesses. Many of the lenders are tech driven and have raised funding from tech players including Google. Others are geography specific, who understand the local culture. Lenders include those floated by larger foreign players looking to gain a foothold in the Indian market.
Affordable housing has come up in a big way and many lenders are accessing the bond market for funds. Rural lending is taking off and is growing rapidly. Micro finance, which was the primary activity of many lenders is now giving way to a wider range of products to the very small borrowers.
Many lenders who are now only borrowing from the non institutional market will be able to access the institutional market going forward, as they grow in size given that they are able to leverage through the bond market and are able to grow their customer base at a fast pace.
Search for Yields will actively cover high yield issuers and try to disseminate as much relevant information and analysis as possible to improve efficiency in the nascent high yield market in India.
We have space where transactors can place their Bids or Offers for High Yield Bonds.
Please do send your comments to email@example.com on this newsletter, which will help us better the offering as we go along.
IDFs are being placed at attractive yields & spreads
L&T IDF recently placed bonds for 5 year tenor at 9.30% with spreads at 60bps over benchmark 5 year AAA bonds. The rating is AAA and given the stable outlook for the ratings, the issue is attractive for traders and investors. Issue size was Rs 1 billion with an option to retain oversubscription for Rs 4 billion.
IDFs given their structure and regulations are credit stable instruments and once liquidity comes into the market for these bonds, spreads will tighten.
According to the RBI, “IDFs would essentially act as vehicles for refinancing existing debt of infrastructure companies, thereby creating fresh headroom for banks to lend to fresh infrastructure projects.
In India, an IDF can be set up either as a trust or as a company. If the IDF is set up as a trust, it would be a mutual fund, regulated by SEBI. Such funds would be called IDF-MF. The mutual fund would issue rupee-denominated units of five years’ maturity to raise funds for the infrastructure projects.
If the IDF is set up as a company, it would be an NBFC; it will be regulated by the RBI. The IDF guidelines of the RBI came in September 2011. According to these guidelines, such companies would be called IDF-NBFC. An IDF-NBFC is a company and comes under the regulation of RBI. IDF-NBFCs would take over loans extended to infrastructure projects; which are created through the Public Private Partnership (PPP) route and have successfully completed one year of commercial production. The takeover of loans from banks would be covered by a Tripartite Agreement between the IDF. The maximum exposure that an IDF-NBFC can take on projects with tripartite agreements is capped at 50% of its total capital funds. Investments are capped at 25% for single party exposure and 40% for group exposure for projects without a tripartite agreement thereby reducing concentration risk to an extent.
IDFs available for investment in the market
- L&T Infra Debt Fund Limited
- IDFC Infrastructure Finance Limited
- India Infradebt Limited
IDF will issue bonds to raise money. The money will then be used to buy out infrastructure loans from banks. Moreover, banks can only sell loans to IDFs after the project becomes commercially feasible.
L&T infra debt fund has investments diversified across multiple sectors including transportation (roads), renewable energy (solar & wind power) and power transmission.
IDFC infrastructure finance has investments in renewable energy, which has the highest share of 34% in the portfolio followed by roads 18%, IT Parks/ SEZs 11% and healthcare 11%. While the road sector projects are PPP projects with tripartite agreements, the balance 82% of portfolio is to projects without tripartite agreements.
India infradebt has investments in road sector, renewable energy sector with few select exposures in health care. 32% of the portfolio is accounted for by non-PPP projects and the balance by road projects (PPP project with tripartite agreements).
Infrastructure projects given their long pay-back period. require long-term financing in order to be sustainable and cost-effective. However, banks which have been the main source of funding for these projects are unable to provide long-term funding given their asset-liability mismatch. Moreover, banks are also approaching their exposure limits. IDFs through innovative means of credit enhancement are expected to provide long-term low-cost debt for infrastructure projects by tapping into the source of savings like Insurance and Pension Funds, which have hitherto played a comparatively limited role in financing infrastructure. By refinancing bank loans of existing projects the IDFs are expected to take over a fairly large volume of the existing bank debt that will release an equivalent volume for fresh lending to infrastructure projects. The IDFs will also help accelerate the evolution of a secondary market for bonds, which is presently lacking in sufficient depth.
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