As per agreement, NHAI extends its full support to DMEDL for its debt repayment. Being subsidiary, DMEDL receives full support in terms of technical, managerial and strategic support from NHAI on a continuous basis.
In the current scenario of higher government borrowing, crowding out of private borrowing is likely to occur in coming days due to rising interest rates as opportunity cost of borrowing money rises. Therefore, it will lead to higher corporate bond yield in near future.
Factors like poor earnings and state bifurcation have led to default on obligation. It can be seen from the example of Andhra Pradesh Power Finance Corporation Ltd & Transmission Corporation of Andhra Pradesh Ltd. After bifurcation of Andhra Pradesh into two states, there was dispute between Andhra Pradesh and Telangana regarding distribution of assets and liabilities. Consequently, it led to default on their obligations towards these companies.
MAFIL has a strong retail franchise, especially in South India, supported by its long-standing presence in the gold loan business. The promoter has an established track record of operating in the gold loan segment and is actively engaged in the company’s operations.
On 17th Vedanta Ltd announced that its board of directors have constituted a subcommittee to evaluate a spinoff of its various commodity categories such as aluminium, iron and steel, and oil and gas businesses into separate listed companies. The objective of de-merger is to bring better transparency in the deployment of the cash surpluses from each business towards reinvestment or towards dividends and shareholder’s value creation.
Despite poor financial performance of UPPCL, its bonds have witnessed good demand from investors. It can be seen from above table that 8.75% UPPCL 2026 bond yield has lost 29 bps since 14th October. The company has the privilege of being guaranteed by Govt of UP and some special structure embedded with the help of RBI which has created a credibility in the market.
Microfinance institutions in India play a vital role in providing credit to people with low income-generating capacity. The basic features of microfinance loans are that they are of small amounts, with short tenures, extended without collateral and the frequency of loan repayments is greater than that for traditional commercial loans. These loans are primarily provided for income-generating activities. In addition, they are also provided for consumption, housing, and other purposes.
In the current covid pandemic, the fiscal position of states has been deteriorated due to the announcement of fiscal packages and lower revenue collection during the economic lockdown. Consequently, it has had an adverse impact on state-guaranteed bonds. In addition to it, weakening profitability and debt burden of state-guaranteed companies have caused their bond yields to remain at elevated levels. Let’s analyze some issuers below.
UPPCL received a loan of Rs 49 billion from Power Finance Corporation and REC. The amount raised was used to partially clear the dues of generating companies. As on July 31, 2021, UPPCL’s pending dues to generating companies stood at Rs 244.61 billion.
Gold loan NBFCs have seen higher NPAs and weak loan growth in the 1st quarter of this financial year, with gold prices down and covid hit economy borrowers unable to pay interest and principal on their loans. However, given that the NBFCs NPAs are still manageable with high capital adequacy ratio, bonds are not impacted.
The commodity boom that has taken up prices of commodities sharply higher over the last one year has been highly positive for debt ridden companies like Vedanta, who at one point of time was struggling to service debt and bond yields had shot up. The strong 1st quarter FY21 numbers is seen in the fall in bond yields of Vedanta. The company will have to use boom time to reduce debt to manageable levels to comfort bondholders.
Hinduja Leyland Finance (HLF) was formed in 2008 and was registered as a non-deposit accepting non-banking finance company (NBFC) in March 2010. The company is promoted by Ashok Leyland Ltd which is the flagship automobile manufacturing company of the Hinduja group.
Tax-free bonds have been stuck in 3.6% to 4.5% range across maturities and issuers from 1 year to 12 years. Even the longer maturity tax free bonds have hardly reacted to rise in gsec yields that have seen the 10 years and above gsec yields rise 40bps to 60 bps across maturities on inflation fears.
5-year Bharat Bond ETF yield peaked at 6.05% during mid-March from 5.67% as on1st Feb 2021. After that it came down to 5.48% during April with a negative spread of 18 bps. As of 15th Jul 2021, 5-year Bharat Bond PSU ETF yield stood at 5.74% with a spread of 14 bps over the benchmark 5 year government bond.
Piramal Capital & Housing Finance Ltd (PCHFL) is a housing finance company formed in February 2017. The company is a wholly-owned subsidiary of Piramal Finance Limited and is the flagship entity of the Piramal group’s financial services business. Piramal Capital & Housing Finance Ltd has been rated as AA by both CARE & ICRA.
Hero FinCorp Ltd (HFCL) is a NBFC, which is an associate company of Hero MotoCorp Ltd. The company’s area of operation includes consumer finance and commercial lending. Its consumer finance segment engages in financing Hero MotoCorp two-wheelers and providing loans against property. In the commercial lending segment, it finances Indian corporates including working capital loans, machine loans among others.
Structured Payment mechanism- Bonds Series III & IV -FY2016-17-Under the mechanism, UPPCL is transferring funds proportionately to the UPPCL bonds servicing account to ensure the accumulation of required funds by T-15 days. The UPPCL bond servicing account is regularly monitored by the debenture trustee. In case if shortfall, the debenture trustee can contact UP state to fund the shortfall by T-10 days. If the state fails to provide the funds, the trustee can contact RBI on T-9th day to directly debit the state's account and make good the shortfall in the next 8 days that is on or before T-1 day to ensure sufficient funds are available one day prior to the due date. Government of UP has given irrevocable written instructions to RBI for the above-mentioned structure.
RRVPNL is 100% owned by the GoR and gets timely support from the state government to compensate its capital expenditure and funding requirements. It can be noted that GoR has infused Rs.2.50 billion of equity in this company as of FY20.
Piramal Capital & Housing Finance Ltd (PCHFL) is a housing finance company formed in February 2017. The company is a wholly owned subsidiary of Piramal Finance Limited and is the flagship entity of the Piramal group’s financial services business.
Metal companies are benefitting due to a surge in commodity prices in the last 1 year. Strong earnings with a better than business environment have resulted in a fall in credit risk for commodity firms.
Tata Cleantech Capital Limited (TCCL) was formed in 2011 as a joint venture between Tata Capital Limited (TCL) and International Finance Corporation (IFC). Tata Capital owns 80.5% share while 19.5% is owned by IFC. TCCL is a Systemically Important Non-Deposit Accepting Non-Banking Financial Company (SI-ND-NBFC) registered with the Reserve Bank of India and classified as an Infrastructure Finance Company (“NBFC-IFC”). TCCL offers finance and advisory services for projects in renewable energy, energy efficiency, waste management, water management and other infrastructure projects which makes a robust presence in ESG sector.
Meghalaya Energy Corporation Ltd (MeECL), an undertaking of the Government of Meghalaya, was formed after the corporatisation of the erstwhile Meghalaya State Electricity Board (MeSEB), with an objective for coordinated development of the generation, distribution and transmission of electricity in the state of Meghalaya.
Infrastructure investment trusts (InvITs) are the same as mutual funds, which allows investors to invest small amounts of money in Infrastructure projects. InvIT is a mechanism that enables developers of infrastructure assets to monetise their assets by pooling multiple projects under a single entity. The primary objective of InvITs is to promote the infrastructure sector in India by encouraging more individuals to invest in the sector and can be modified according to a given situation.
In the latest circular issued by SEBI on perpetual bonds with respect to its exposure in mutual funds, perpetual bond yields have risen sharply by 45bps to 120bps since 12th March 2021. The uncertainty on valuation has hit liquidity in the bonds leading to rising yields.
REIT is an investment trust that owns, manages, and operates income-producing real estate assets. It allows individual investors to make investments in this platform and earn income in the form of rental yields and appreciation in capital values of the property.
State government-guaranteed bonds are issued by state-backed companies and are embedded with unconditional and irrevocable guarantee by state governments, which acts as a principal debtor. Owing to guarantee by respective state governments, their bond yields are impacted by state fiscal positions. In the current scenario of Covid-19 crisis, state guaranteed bonds are exposed to risk driven by the widening fiscal deficit of states. Therefore, yield of state guaranteed bonds are likely to move up as SDL yields move up. State government-guaranteed bonds are issued by state-backed companies and are embedded with an unconditional and irrevocable guarantee by state governments, which acts as a principal debtor. Owing to guarantee by respective state governments, their bond yields are impacted by state fiscal positions.
PSU tax-free bonds of IRFC, PFC, and others have hardly seen any yield movement upwards even as the taxable bond yields of the same issuers have risen by 40bps to 60 bps over the last 2 months. Bond yields have risen in the market on worries of inflation and government borrowing and it is a matter of time before tax-free bonds see a spike in yields.
India Bull Housing Finance results show stress in its business even as LIC Housing and HDFC, the benchmark lenders, have shown reasonable performance under the current environment. The bond market is treating India Bulls Housing as a potential downgrade candidate, even from its current AA rating.
Bharat Bond ETF yields and spreads are likely to witness an uptrend in coming days as fiscal deficit for current fiscal year jumped to 9.5% of GDP while it has been pegged at 6.8% for next fiscal year driven by higher borrowing. Consequently, it will lead to capital erosion with fall in Net Asset Value.
The HNI investor community has driven down yields of bonds that were trading at higher yields and spreads. The low yields in government bonds, PSU bonds and other highly rated bonds have driven the HNIs to the high yield space. While yields and spreads of bonds of Shriram Transport, UPPCL, Indusind Bank Perpetuals have declined, a lot may issuers are tapping the HNI market through structures such as MLDs.
Tax free bond yields have come off to ultra-low levels with short yield yields trading below repo rate of 4% and long end yields just 40bps to 50bps above repo rate. At these levels of yields, investors, predominantly the very high net worth investors, are shunning the bonds and bond yields have started to rise.
PFC will open its public issue of secured, redeemable Non-Convertible Debentures (NCD) on January 15, 2021. The NCDs are of the face value of Rs 1,000 each. The company in a statement said the base issue size is Rs 5 billion with an option to retain oversubscription of up to Rs 45 billion, aggregating up to Rs 50 billion.
Corporate bonds trading at over 8% offer spreads anywhere between 200bps to 500bps depending on maturity and yield. At these spreads, the bonds indicate higher credit risk but do not indicate a deterioration in credit hereon, which may be wrong. However, they do indicate a gsec yield curve shift up as, current levels of yields below 5% at the short end look unsustainable given inflation, deficits and asset price bubbles.
Large borrowers, Vedanta and SREI infra have been facing significant stress on their debt indicating that business conditions of many borrowers have deteriorated despite the fiscal and monetary pump-priming due to covid. Credit markets have seen easing of credit risk post the liquidity infusion by RBI but there are many large borrowers that are still facing high stress. Bond holders of stressed companies will face default issues and this could lower credit risk appetite.
An analysis of bonds that trade in the 7% to 8% range reveal that most of the bonds have longer maturity of 7 years and above and many of them are perpetual bonds that carry their own risk. Once interest rates starts to rise in the economy, such bonds will see steeper price fall.
CPI inflation for November 2020 was at 6.93% and with RBI repo rate at 4%, government bonds and corporate bonds of short to medium maturity are trading at levels of 3.25% to 6%. Government bonds of over 15 years and SDLs of 10 years and above maturity are trading in the range of 6.25% to 7%. Corporate bonds of 10 years and above maturity are at levels of 6.5% to 7%.
State government-guaranteed bonds are mostly issued by state-owned entities that are loss-making and are unable to service debt on their own. Power distributors suffer from selling power cheaper than the cost of buying or generating power and the difference is borne by the state. States do not have funds to pay for the losses that keep accumulating and banks stop giving loans as dues mount. Hence bonds issued by such entities are subject to 2 risks, 1. states not paying the entities for losses and 2. states not having discipline to service the debt.
FIIs have pumped in around USD 15 billion into India equities as of fiscal 2020-21 year to date but have sold debt worth around 5 billion. The FII trade signifies that government spending and ultra loose monetary policy will lead to high inflation that will drive up asset prices.
RBI will keep interest rates unchanged in its policy review this week, the repo rate at 4% is at record lows and with banks having huge surplus liquidity, deposits rates are below 4% for many banks. Investors in bank deposits are getting hardly any returns post-tax.
The US Treasury yield curve was last inverted in 2007, just before the great 2008 credit crisis and the recent inversion of the curve has spooked markets. More importantly, the Risk Off nature of markets on the UST curve inversion can add to the Credit Stress in India, where there is a Credit freeze for most borrowers and a weak business outlook is hurting more corporate balance sheets.
Srei Infrastructure Finance Ltd raised funds through a public debt issue in May 2019, when it was rated AA+. The rating since then has been downgraded to A+ with a negative outlook and investors who had invested in the debt issue are facing the implications of the downgrade, which are rise in spreads and lack of liquidity.
State government guaranteed bonds are supposed to carry the risk of the State but while SDLs are seen as almost risk free, guaranteed bonds carry higher risk, whith bonds of such entities defaulting across periods of time due to various issues. Normally the underlying issuer will not be able to service debt on its own due to the subsidies given by the state governments.
AAA to default in just a matter of months, can a company mess up in a few months or has the mess accumulated over ages? In the case of IL&FS, the mess has definitely accumulated over ages as per the latest revelations of the probe by the government.
India Bulls Housing Finance is a classic example of bond markets differing from rating agencies on its credit risk. Spreads are way higher than an average AA- rated bond of a housing finance company. The company has been buying back bonds from the market but still the lack of institutional liquidity is keeping the spreads high.
Retail investors have shown preference for higher yielding bonds of CV lenders such as Shriram Transport Finance and Cholamandalm Investment (perpetual bonds with 3 year yield to call). Institutional investors are largely in M&M Finance and Sundaram Finance. The trading frequency and bond yields and spreads of CV lenders helps us understand investor preference.
Corporate bond yields and spreads over government bonds have dropped substantially since April 2020. RBI lowering interest rates to record lows and guiding for low rates for the rest of this fiscal year has lent stability to corporate bond yields at lower levels in the 1 to 3-year maturity segment. However, over 3 years, the risk of interest rates rising hangs on the market and makes investments risky.
In March-April 2020, RBI provided banks TLTRO liquidity of Rs 1.128 trillion, Banks were required to acquire up to 50% of their incremental holdings of eligible instruments from primary market issuances and the remaining 50% from the secondary market, including from mutual funds and NBFCs.
In the October 2020 RBI Policy, the central bank maintained status quo on rates and announced liquidity measures such as on tap TLTRO with tenors of up to three years for a total amount of up to Rs 1 trillion at a floating rate linked to the repo rate
INRBonds has been covering perpetual bonds since the time it has been launched and highlighting the risks it brings to investors. Perpetual bonds spread movement shows that the spread of lower-rated banks such as Punjab & Sind Bank and The South Indian Bank has widened while the spread of big private sector banks and public sector banks has contracted from the levels seen in March 2020 but witnessed an uptick in the spreads during the month of September 2020.
Credit Spreads Snapshot For The Week • 3 and 12 Months CD yields rose by 5-15 bps. • 3 and 12 Months NBFC CP yields fell by 8-15 bps. • Morgan Stanley India Primary Dealer Pvt Ltd issued Rs 6.3 billion, 4-year bond at 5.33%, 80 bps spreads • Bajaj Finance Ltd , AAA, issued Rs 100 million, 10-year bond at 7.25%, 219 spreads • FII debt utilization status stood at 31.78% of total limits. FIIs investment in bonds came down by Rs 45.51 billion
Credit Spreads Snapshot For The Week • 3 and 12 Months CDF yields fell by 5-9 bps. • 3 and 12 Months NBFC CP yields fell by 10-18 bps. • Magma Housing Finance Ltd, AA-, issued Rs 1.4 billion, 1.5-year bond at 8.48%, 436 bps spreads • SBI Cards and Payments Services Ltd, AAA, issued Rs 5 billion, 3-year bond at 5.75%, 140 spreads • FII debt utilization status stood at 32.32% of total limits. FIIs investment in bonds came down by Rs 9.17 billion
Private placement of Corporate Bonds for the period April-July 2020 was at Rs 2.69 trillion against Rs 2.08 trillion in April-July 2019, rising by 29% in a year,as the Covid-19 illiquidity premia reduced under the impact of Operation Twist and TLTRO 1.0 in the last four months and lower borrowing costs have led to record primary issuance of corporate bonds.
RBI is scheduled to release its monetary policy on 6th August where we expect no change in policy rates. Read our note on policy expectations. Credit spreads were stable in pre-policy week.RBI moratorium decision will weigh on Banks, NBFCs and HFCs bond spreads movement.
In the first fortnight of June 2020, Commercial Paper issuance rose 32% by Rs 686.92 billion against Rs 521.56 billion in the second fortnight of May 2020. Higher surplus system liquidity and lower benchmark interest rates pulled down CP rates. In the last one month, A1+ NBFC CP yields came down by 130 bps to 4.6%.
In March-April 2020, RBI provided banks TLTRO liquidity of Rs 1.128 trillion, Banks were required to acquire up to 50% of their incremental holdings of eligible instruments from primary market issuances and the remaining 50% from the secondary market, including from mutual funds and NBFCs.I
Post Franklin Templeton issue, and failure of NBFC TLTRO, RBI has decided to provide Rs 500 billion Special Liquidity Facility for Mutual Funds (SL-MF). RBI will conduct repo operations ( from 27th April-11th May) of 90 days tenor at the fixed repo rate of 4.40%.
The market reaction to Franklin Templeton shutting down funds for a total of Rs 280 billion in AUM was a sell-off in financial stocks led by the largest NBFC in India, Bajaj Finance that fell 10%.
In the Union Budget 2020-21, the limit for FPI in corporate bonds was increased to 15% of the outstanding stock of corporate bonds which was 9% earlier.However, the budget is not seen as addressing the issues of growth and of frozen credit markets in any substantial way and this will keep credit markets frozen.
Credit Spreads rose after RBI’s statement on conducting Operation Twist for the second consecutive week. The purchase of 10-year benchmark bond is keeping yields on the bond artificially low and this is leading to spreads rising, as yields on other bonds are almost flat
Yes Bank bond spreads are trading at levels of 450 bps to over 500 bps on the back of deterioration in the bank’s balance sheet that led to rating downgrades. Read our note on Yes Bank Perpetuals. The credit market is risk averse with spreads between the PSU Bonds and all other bonds at higher levels.
Yes Bank bond spreads are trading at levels of 450bps to over 500bps on the back of deterioration in the bank’s balance sheet that led to rating downgrades. Read our note on Yes Bank Perpetuals. The credit market is risk averse with spreads between the PSU Bonds and all other bonds at higher levels.
3 year bonds are trading at spreads of 100 bps for PSU issuers (Non REC-PFC) while top quality low credut risk NBFCs bonds are trading at 145bps spreads Such sreads look extremely attractive on the yield curve, given low interest rates and liquidity infusing measures by the RBI.
In the Union budget 2018-19, the government showed its intentions to consider mandating, beginning with large Corporates, to meet about one-fourth of their financing needs from the bond market and A grade rating corporate bonds as eligible for investments.
10 Year SDLs and 10 Year AAA Corporate Bonds are trading at almost similar spreads of 55-60 bps against the benchmark 10 year g-sec. SDLs are perceived as risk free given States access to the central government and RBI for funds to meet debt obligations, if required.
Manufacturing sector Commercial Papers (CP) 3 months, 6 months and 12 months maturity yields are at levels of 6.68%, 7.30% and 7.70% respectively. NBFC Commercial Papers (CP) 3 months, 6 months and 12 months maturity yields are at levels of 7.27%, 7.55% and 7.90% respectively.