Corporate bond market sees flight of capital towards less risky papers
AAA companies have raised a total of Rs 92,191 crore in the quarter ended June 2019.
AAA companies, the highest rated ones, have raised a total of Rs 92,191 crore through 147 issues in the quarter ended June 2019, double the Rs 47,393 crore raised in 88 issues in the quarter ended June 2018.
Lower rated companies from AA to A have raised a total of Rs 10,112 crore in the quarter ended June 2019, half of the Rs 20,297 crore raised in the quarter ended June 2018.
More importantly, as much as 90 per cent of the total Rs 1.02 lakh crore has been cornered by AAA companies in the first quarter of the current fiscal compared to 60 per cent of the total Rs 78,463 crore raised in the first quarter of the last fiscal. In other words, though the total amount of money raised through primary issuances has increased, higher rated companies have been able to corner a majority of the money this year versus last.
“The data clearly shows that there is a flight of capital towards the less risky instruments,” said Sandeep Bagla, associate director at Trust Capital. “Investors especially institutional ones like mutual funds and insurance companies have moved away from lower rated companies and are preferring the safety of AAA companies. This means that lower rated companies have to look at different pools of capital like bank loans.”
Risk aversion in the corporate bond market started after IL&FS Financial Services, a group company of the Infrastructure Leasing & Finance Services Ltd (IL&FS), defaulted on payment obligations of bank loans (including interest), term and short-term deposits and failed to meet the commercial paper redemption obligations due on September 14, 2018.
The default by this AAA rated group with more than Rs 90,000 crore of outstanding debt sent shock waves in the market as banks, mutual funds and insurance companies had to provide for possible losses from their investments. This contagion has now spread to other non-banking finance companies especially housing finance companies, which had so far relied on short-term borrowings to finance their long tenure home loans.