Junk bonds issuance not yet worrisome

If there is a spike in such issuances, it may add to systemic risk in case issuer ends up defaulting

Reserve Bank of India Deputy Governor Viral Acharya said in the post-policy interaction with the media that the central bank was examining “very closely” if lower-rated firms were raising bonds from the market, taking advantage of the low-interest rate scenario. While the money raised by any firm falls within its legitimate rights of doing business, if there is a spike in such bond issuances, which inevitably ends up in the hands of volume investors such as mutual funds, it may add to systemic risk in case the issuer ends up defaulting on its obligation. Recently, a few instances of that happening have given enough credence to the systemic risk angle. 

However, the data gathered from Prime Database show that the central bank, or anybody for that matter, need not worry too much about the issue. The issuance data from the past three full financial years, and the present financial year until July, show that the junk bond issuance (credit rating of BB or lower) has been tiny, compared with the total issuances in private placement. For this analysis purpose, the data have been taken for private placements only as 95 per cent of the total corporate bond issuance, and all the speculative grade bond issuance are privately placed. The data show that in FY14-15, the total junk bond issuance was Rs 2,202 crore, which increased to Rs 2,967.29 crore in FY15-16 and then at Rs 3,098.74 crore in FY16-17. So far in FY 17-18 until July, there has been no bond issuance rated BB- and below. To give a perspective, the total privately placed bond issuance in FY14-15, FY15-16 and FY16-17 and FY 17-18 till July, has been Rs 4.57 lakh crore, 4.70 lakh crore, Rs 6.92 lakh crore and Rs 2.27 lakh crore, respectively.