India's Junk Bonds Spurned by Funds Preferring Cash to 11% Yield

  • Low profits and corporate governance issues remain concerns
  • `The search for high-yield is taking a hiatus': Sundaram

The world’s junk bond investors have become a lot more discerning in 2016 and Indian borrowers are bearing the brunt.

Dollar-denominated notes from 16 Indian non-investment grade issuers including Rolta India Ltd. and Vedanta Resources Plc lost as much as 1.5 percent on average from Dec. 31 through the start of this week, before gaining by that amount through Thursday, according to a Bank of America Merrill Lynch index. While the average yield has dipped back to 10.9 percent from a seven-year high of 12.5 percent in January, low profits and corporate governance issues are weighing on investors’ minds.

“As liquidity is drying up globally, the search for high yield is taking a hiatus,” said Dwijendra Srivastava, Mumbai-based chief investment officer for debt at Sundaram Asset Management Co., which manages the equivalent of $3.5 billion. “India in particular has been witnessing a weak corporate earnings cycle. A lot of commodity companies which have raised overseas monies have poor profitability.”

Indian firms have about $23 billion of offshore bonds to repay before the end of 2018, a task made costlier as the rupee last month neared a record low and the Sensex stock index tumbled. Companies on the gauge have suffered two straight declines in average quarterly earnings and a measure of producer prices has dropped for 15 months. Global fund managers have preferred to hoard money, with a Bank of America survey showing 5.6 percent of their assets were in cash last month, the most since November 2001.

The biggest loser in Bank of America’s dollar bond index was technological services firm Rolta, whose July 2019 notes have fallen 18 cents this year to 34.4 cents on the dollar to yield 52 percent, according to Bloomberg-compiled prices. Also in the red was London-listed resources giant Vedanta, whose January 2019 debentures are yielding 23 percent.

Foreigners aren’t just snubbing dollar bonds. Their holdings of rupee-based corporate and government debt fell by 87.6 billion rupees ($1.3 billion) in February, the biggest pullback in almost two years, data from National Securities and Depository Ltd. show.

While Indian junk dollar bonds rallied this week as raw materials rebounded, their yield premium over Treasuries still stood at 970 basis points, up from a low of 436 last June. The Bloomberg Commodity Index has lost 25 percent in the last year, despite a rally in oil and iron ore.

Overreaction?

As commodities find a bottom, some investors are returning to Indian junk, according to Abhishek Bhalotia, the London-based chief executive officer of Kotak Mahindra U.K. Ltd., part of the banking group that manages $14.2 billion globally.

“The markets seem to have overreacted across the Indian high yield space,” he said. “The ones which have better fundamentals and credit history are recovering fast. We expect this trend to continue.”

The multi-year slump in raw material prices has pressured the asset quality of Indian banks as they struggle to cure some $117 billion worth of stressed assets, chiefly from iron and steel and infrastructure companies. That’s spurred the government to pump more capital into state-run lenders and ease access for foreign investors interested in the nation’s defaulted corporate bonds.

Some $7 billion of Indian firms’ foreign currency debt will mature in 2016, including $1.3 billion owed by Vedanta, according to data compiled by Bloomberg. Another $6.1 billion becomes due next year and $9.5 billion in 2018. Over the past four months, Vedanta, Rolta, Tata Motors Ltd. and Indiabulls Real Estate Ltd. have spent at least $800 million buying back their own offshore notes.

“Bond redemption and the weak commodity space are keeping the pressure on the market, but what you really get in the index is not exactly the torch-bearers of corporate India in areas like governance,” said Jayavardhan Diwan, a money manager in Mumbai at hedge fund OIM Capital LLC. “We have reduced our holdings over the past year. The choices are rather limited for investors.”

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