Risky Corporate Bond Issuances Spike As Investors Chase High-Yielding Debt

Indian investors looking for better returns and to diversify from equities are lapping up high-yielding but riskier corporate bonds as demand for domestic debt rises.

Funds raised by issuing low-investment grade corporate bonds, rated ‘BBB-', have surged over eightfold to Rs 15,419 crore so far this year, according to data from Prime Database. Debt rated below 'BBB-' is considered non-investment grade.

Similarly, issuances of corporate bonds rated 'B-' to 'BBB-', bracketed in the riskier category, have doubled to Rs 20,559 crore, while funds raised via 'B-' issuances jumped 65 times over the previous year.

The issuances reflect increasing risk-taking among investors in search of better returns, even though the total amount is just 0.017% of overall corporate bond issuances worth Rs 11.5 lakh crore in India. 

Lower returns from the traditional investment space are driving a large segment of investors to the high-yielding debt market, according to Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. 

Fixed and recurring deposits and higher-rated credit instruments offer returns in single digits, Srinivasan told BQ Prime. Market-linked debentures and plain vanilla pure debt mutual fund plans also lost sheen as income tax amendments in the last budget made them "unattractive" to many investor segments, he said.

As many as 2,789 companies have issued bonds and debentures, offering rates between 10.01% and 15%, according to the data from National Securities Depository Ltd.

High-yield bonds always carry default, liquidity risk and interest rate risk depending on how low their credit rating is, Srinivasan said.

The supply for these riskier bonds has always been there, but investor interest was missing earlier, according to Ajay Manglunia, managing director and head of the investment-grade group at JM Financial Products Ltd. “Now the corporates and investors who need better yields are meeting up because they aren't getting it in institutional segments.”

Search For Alternatives

More high-yield bond offers coincide with an increase in overall public debt issuances by corporates. Fundraising through bonds by domestic companies surged 24% over 2022 to about Rs 11.5 lakh crore this year, according to data from NSDL.

A lot of new companies are issuing bonds because of the growing retail participation, Manglunia said. “People who are booking profit in equity are incrementally allocating it to the debt side instead of investing back in the equity market.”

There have been a lot of maiden ‘A-', 'A+', and ‘AA-' offers that have received a decent response from all classes of investors looking to diversify their portfolio and for better returns, he said. 

Companies, on the other hand, are looking for acquisition and growth opportunities, and banks don't lend for buyouts, Srinivasan from Rockfort Fincap said. "Such entities also look for private credit deals where the interest rates are comparatively higher.”

Manglunia expects the issuance through the high-yield market to grow 30–40% year-on-year, while the overall bond market could grow at least 15-20%.

"We expect this trend to continue considering the current tight liquidity scenario; many lower-credit entities are looking for alternate sources of lenders other than banks," Srinivasan said. 

Further, foreign portfolio investors may explore such investment opportunities as India is becoming the favourite among Asian emerging markets, according to Srinivasan.

Foreign Inflows Into Debt Spike

Foreign inflows into the debt market have risen to a six-year high, driven by elevated yields and the attractive structure of the market.

Overseas investors, so far this year, have net invested Rs 37,485 crore—the highest since 2017—in the Indian debt market, according to the data from National Securities Depository Ltd.

While inflows stood at Rs 7,544 crore from January to May, the investments spiked to Rs 29,941 crore in the following months, from June to October.