In 6 months, 41% of NBFC debt papers due for refinancing: Credit Suisse

About 41% of those debt papers, though, are due for refinancing in the current financial year, Credit Suisse has said in a report

Mutual funds’ (MFs’) exposure to non-banking financial companies (NBFCs), through short-term commercial papers (CPs), has risen three times since 2016. And around 41 per cent (median) of these papers are due for refinancing in the current fiscal year, said Credit Suisse in a report.
 
Given the high exposure and the current uncertainty, MFs may be unwilling to fully refinance the exposure, added the report.
 
The brokerage noted that the share of non-banking sources of funds for NBFCs has grown to 74 per cent, as of March 2018, as interest rates in the market was at multi-year lows. Bank loans, in comparison, were costlier for the segment.
 
The IL&FS default has shaken the confidence in the system, and some MFs are trying to sell papers of NBFCs even at a discount. Last Friday, DSP Investment Managers sold its exposure to DHFL CPs at an 18 per cent discount, prompting a sell-off in NBFC stocks as investors believed there are liquidity constraints with NBFCs. DHFL’s stock plummeted 44 per cent last Friday, only to recover by 12 per cent on Monday.
 
MFs have been consistent buyers of NBFC equity stock as well as debt papers, with their exposure to NBFC CPs up three times since March 2016, the Credit Suisse report said. As of March 2018, MFs held an estimated 60 per cent of the total outstanding NBFC commercial papers (CPs).

 

Also, for MFs CPs accounted for about 60 per cent of their NBFC debt exposure in March 2018 compared with 41 per cent in March 2016. “MFs are likely to cap/prune their NBFC exposures, even as credit ratings for most NBFCs are maintained.

Appetite for NBFC papers with banks is also uncertain, given that their exposure is already high at 6 per cent of total loans,” the report said.

The share of Corporate Bonds and CPs as a percentage of total debt investments made by MFs has increased over the past five years from about 25 per cent in March 2012 to over 65 per cent as of March 2018.
 
The volatility in the market over the last fortnight and with rumours influencing investor behaviour, the yields on NBFC CPs have risen by a whopping 175 basis points.
 
Some companies, in order to assure investors, have said that they will reduce their exposure and reliance on CPs over the course of the current financial year, to cure their liquidity position. However, if buying interest in CPs depreciates further, the yields on these instruments will rise, leading to losses for MFs.

“NBFCs with relatively weak pricing power will see net interest margin compression, given the rise in funding cost on the back of tightening liquidity and widening credit spreads,” Credit Suisse stated.

However, despite reassurances from companies that their debt instruments are of investment grade and that there are no defaults in terms of their financial liabilities, NBFC stocks continued to fall on Monday.