In This Issue:
- Editor’s Column – Rate Hike Cycle is Credit Positive
- Rating actions over the last one year
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Rate Hike Cycle is Credit Market Positive
RBI hiked rates for the first time in over 4 years, hiking the repo rate by 25bps in its policy review on the 6th of June 2018. The significance of the rate hike is the positive vibes given by the RBI on the economy. Closing of output gap suggests that demand is picking up in the economy leading to higher capacity utilization. Investment demand will also rise as companies add capacity. Once investment demand picks up, credit cycle will revive leading to a self fulfilling expansion of consumption, investment and credit. Read INRBONDS coverage of RBI Policy.
Rate hikes are usually front run by markets and INR Bonds are largely factoring in multiple rate hikes. Given that, as the consumption, investment and credit cycle rise, inflation expectations too rise and till such time as demand-supply equilibrium balances, inflation expectations would stay elevated. However, i must point out that India’s inflation tolerance has fallen at least by 200bps from levels of 6%-8% to levels of 4%-6% and this will bring down overall rates in the economy.
Search for Yields will gather momentum in the coming months as a rising credit cycle will see more issuers approaching markets for funding. Upgrades too will pick up as the economy expands and this can lead to play on credit spreads. Overall, the bond market is looking at more activity on credits.
Credit markets is similar to equity markets where valuations start rising as visibility on earnings pick up. Investors will actively search for issuers where markets are mispricing credit risk as that can lead to high capital gains, as credit spreads fall. This will lead to demand for lower rated credits, which will improve both pricing as well as liquidity in the high yield market.
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 a space where transactors can place their Bids or Offers for High Yield Bonds.
Please do send your comments to paresh.nemade@zephyr,org.in on this newsletter, which will help us better the offering as we go along.
Rating Actions over the last one year
Analysing rating upgrades & downgrades over the last one year, Issuers that saw most upgrades were private banks, NBFCs, and housing finance companies. Companies that saw rating upgrades were (Bandhan Bank, RBL Bank, Sundaram Finance, HDFC Credila Financial, NeoGrowth Credit, Bajaj Finance, Indiabulls Housing.Good lenders have been able to grow balance sheets even as they kept books clean, which indicates good retail consumption demand.
Microfinance companies are expected to turnaround going forward, as asset quality headwinds faced by the microfinance companies due to demonetization seems to have passed. NBFCs and HFCs are also expected to deliver stable performance. NBFCs have grown steadily in the last few years and they are expected to gain market share going forward. The expansion would be supported by NBFCs’ ability to customize products, price the risk and manage ultimate credit costs, especially related to small-ticket loans, light commercial vehicle (CV), used CV, small-ticket housing loans and loan against property. However, competition is likely to intensify in certain segments such as large-ticket housing, new heavy CV and large-ticket loan against property. The loan book of NBFCs in India grew at a CAGR of around 17% from FY 2017-18 to 2018-19. Given that NBFC’s NPA levels are lower than other lenders, retail-focused NBFCs are expected to do well.
HFC industry also remains healthy with affordable housing emerging as a new growth driver. The government of India is focusing on affordable housing schemes. Housing Finance sector has aggressive competition as the market has two categories of players, Housing Finance Companies with 36% market share and Banks with 64% market share. PSU Banks are still in balance sheet cleaning up process and their share will be aggressively taken up by private lenders.
Issuers that saw most downgrades were Public Sector Bank and Telecom.
Banks that saw downgrade included Bank of Maharastra, Corporation Bank and UCO Bank. Telecom companies thath saw downgrades included Airtel, Aircel and Vodafone.
The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. Public-sector banks control nearly 73% of the market share, going forward PSB banks market share is expected to come down gradually being replaced with private sector banks and NBFCs.
Overall Indian banking sector asset quality has seen deterioration with gross non-performing advances in the banking system trending upwards. As per RBI financial stability report, banking sector, gross NPAs increased to 10.5% in March 2018 from 9.6% in March 2017 and expected to touch 11.1% by September 2018, which is the primary cause for downgrades.
However NPA referred to NCLT is positive for the banking sector, as NPA referred to NCLT will enable them to reduce their bad loans over the medium term. Banks can take advantage of the IBC to clean up their balance sheets. Recently Bhushan steel and Electrosteel was bought by Tata steel and Vedanta respectively.
Telecom – Intense competition, high Capex, and regulation are the biggest problem for the telecom sector, entry by Reliance Jio has forced other telecom operators to cut their prices due to which telecom business has constrained profitability and cash accrual. New technology could necessitate fresh investments or overhaul of existing networks. The advent of 4G, for instance, has seen operators investing substantially in upgrading infrastructure even before they had made significant returns on investments in 3G.
Telecom is a highly regulated market. Government reduced call termination charges for domestic calls to 6 paise from 14 paise and for international calls to 30 paise from 53 paise which affected the profitability of large incumbent players.
List of few majors NCDs, CPs, and CDs upgrade and downgrade by Crisil and ICRA (June-17 to May-18)
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