As the COVID-19 pandemic disrupted the economy, investors shied away from lower-rated corporate bonds amid concerns about a lack of liquidity, fear of debt defaults, and weak governance standards at smaller businesses.
“The asset quality origination has become much better over the last year. Credit environment is very good,” Vivek Ramakrishnan, vice president of investments at DSP Mutual Fund, told Reuters in an interview on Friday.
“Spreads are wafer-thin between government bonds and AA+ and AAA-rated bonds, and pricing in such companies is very competitive. So investors can prefer some pick up in yields,” said Ramakrishnan, who manages the corporate bond fund and credit risk fund among others at DSP.
Three Indian issuers that are rated A- and below are scheduled to raise funds next week via shorter tenor bonds, indicating an improved investor appetite for such notes. The rates for these papers are in the range of 10.50-14.00%. “It does make sense currently to move some money into high-yield bonds, as the economy is expected to be better after coming out of the pandemic,” he added.
With interest rates near their peak, it would be a good opportunity to lock some funds in relatively high-yielding bonds, the fund manager said.
The Reserve Bank of India is widely expected to raise the repo rate by 25 basis points next month to 6.50%, followed by a prolonged pause. It has raised the repo rate by 225 bps in the May-December period. However, investors should also analyse the liquidity profile of these companies, he said. “If the question is whether funds should be taking some credit risk, the answer is yes as the credit environment has been improving post the pandemic.”
A major reason for declining spreads was lower supply from corporates. The central bank’s surprising move to start its rate-hike cycle led to extreme volatility and a spike in yields.
Most companies chose to wait in the first half of the fiscal year for rates to settle before coming up with fundraising plans.
Bank Credit is looking expensive, indicating that the spread between loans and bonds would narrow, and companies will approach the bond market instead of bank loans, Ramakrishnan added.