Corporate debt investors should turn their attention towards mid-rated bonds, particularly ‘A’ rated securities, as debt protection metrics of companies issuing such bonds have improved sharply, with leverage parameters similar or better than ‘AA’ firms a few years ago, CRISIL Ratings said.

“Investors generally avoid bond issuances below ‘AA’ category as they tend to club mid-rated issuances with ‘non-investment grade’ issuances. This could be attributed to the perception that debt protection metrics of mid-rated corporates carry materially higher volatility and default risk,” the rating agency said in a note on Thursday.

Countering this perception, CRISIL said that a recent study of mid-rated issuers showed robust business growth and stronger balance sheets, which have bolstered the credit profiles of ‘CRISIL A’ category issuers over the past seven years.

Prudent capital allocation and capital expenditure decisions by such issuers have resulted in leverage metrics that are now similar or better than ‘AA’ category rated corporates a few years ago, CRISIL said, attributing the improvement to firm economic growth, continuous deleveraging, and prudent liquidity management practices.

The rating firm said that while the size of outstanding Indian corporate bonds increased by more than 50% over the past five years to Rs 44 lakh crore as on September 30, data indicated that 94% of issuances were in the AAA and AA rated categories – the highest-safety brackets.

CRISIL said that as things were poised, there was a “win-win” opportunity for both investors and issuers as deploying funds in mid-rated bonds would facilitate better portfolio diversification for buyers while issuing companies are on the lookout for sources of finance other than bank loans.Investors also stand to benefit from higher risk-adjusted returns from mid-rated corporate bonds, the rating agency said.“For the record, mid-rated ‘A’ category bonds offered 2-3 times higher risk-adjusted returns compared with ‘AA’ category rated bonds over the past three years,” CRISIL said.

The thrust for issuers to raise funds stems from the government’s focus on building infrastructure amid rapid economic growth.

“…there has been a positive shift in Loss Given Default (LGD) trends in the Indian context over the past decade. LGD is a measure of loss that lenders or investors incur post default on debt instruments,” CRISIL said.

The favourable transition in the LGD metric has been helped by a stronger insolvency and bankruptcy regime, with the insolvency process acting as a deterrent for issuers resorting to wilful default.

The recent decision of the government and the capital markets regulator to launch a corporate debt market development fund has also instilled confidence in investors as the fund would ensure sufficient market liquidity during episodes of stress, CRISIL said.

(You can now subscribe to our ETMarkets WhatsApp channel)

(What’s moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

Download The Economic Times News App to get Daily Market Updates & Live Business News.

Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price


Source link