Corporate bond yields spike as coronavirus-induced fears grip investors

Illustration by Ajay Mohanty
The corporate bond yields have shot up, widening the spread between them and government bonds, as investors shun the companies fearing defaults due to coronavirus-induced slowdown.


“Locally bond markets had already become very discerning due to the NBFC crisis. So the main issuance was dominated by public sector units (PSUs) or stronger credits. Rolling over and refinancing will certainly become more difficult, especially as credit spreads have widened,” said Gaurav Kapur, chief economist of IndusInd Bank.


The spread between equivalent maturity government bonds and corporate bonds have also widened considerably in this period. The spread for AAA and AA bonds were at 95 basis points and 166 basis points, respectively, on March 3. That has now widened to 130 and 197 basis points, respectively.


Yields on the non-banking finance companies papers have risen to 8.5 per cent now, from 7.25 per cent on March 3, which is to say that NBFC yields are back at October 2018 level, said Kotak Mutual Fund in a report.


“Effectively, market has chosen to forget all the previous rate cuts, policy actions and buying supports. Three-year MCLR of banks is in the band of 7.85-8 per cent. While three-year HDFC is trading at 8.25 per cent, that of Bajaj Finance is at around 8.5 per cent. Three-year REC is trading at 8 per cent. These NBFCs/HFCs are not likely to borrow from capital market in the near to medium term future,” the mutual fund noted. Expecting a major hit on consumer demand, corporates are demanding special relaxations from the Reserve Bank of India (RBI) and the government.  “Both bond and loan defaults will exponentially rise if the RBI doesn’t allow two years moratorium on principal payment and six to one year moratorium on interest payments. The slowdown will have a huge consequence on bank’s non-performing assets,” said Prabal Banerjee, group finance director at Bajaj Group.

A similar sentiment was echoed by Aditya Puri, HDFC Bank managing director and CEO. “We have to clearly come out with forbearance across the length and breadth because the cash flow of almost all companies will be affected if we have the lockdown.”


Even rating agency executives are getting wary of defaults. “Defaults would likely rise in bank loans if the current lockdown continues beyond March 31. The impact may first be visible in consumer lending to non-salaried borrowers, followed by SMEs and mid-cap companies. The severity of defaults depends upon how long this crisis continues,” said Ananda Bhoumik, managing director at India Ratings and Research.


However, bonds are now getting issued by mostly AAA-rated entities and PSUs, where the risk of default is lesser than lower-rated entities, bond arrangers said.  India is not alone in this. Even the firms in the US will not be spared from defaults, rating agencies have cautioned. Moody’s expect the coronavirus-induced slowdown to hit a minimum of 16 per cent of US companies, and 45 per cent of the companies in the worst scenario. The normal default rate is around 4 per cent only.


Generally, the fourth quarter of the fiscal year is the busiest season for corporates, and bond issuances peak. Every year, the issuances are also on the rise. But in the fourth quarter, the issuances have fallen. And almost all issuances are from NBFCs and government-owned entities.


Between January and March so far, Rs 1.85 trillion worth of bonds have been raised from the market by NBFCs, PSUs, and corporates. In the year-ago quarter, bonds issued were Rs 2.40 trillion. Similarly, in the third quarter of fiscal year 2019-20, the total issuances have been Rs 1.63 trillion, but in the year-ago third quarter, the issuances were over Rs 2 trillion.


The 10-year bond yields closed at 6.38 per cent.

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