Stimulus to ease funding burden for India's weakest firms in Covid era

India's  weaker borrowers are facing a record amount of local-currency bonds coming due this quarter, but unprecedented stimulus steps may mean they are better equipped to pay back their debt than in the past.

Local companies ranked below AA+ need to repay a total of 383 billion rupees ($5.1 billion) of notes in the July-September period, the highest ever, according to Bloomberg-compiled data. Fundraising has become much cheaper for the firms though, after cash infusions of about $50 billion by the country’s central bank and a $277 billion rescue package for the economy by the government.

Yield premiums on 10-year rupee bonds ranked BBB have dropped about 80 basis points from an 11-year high in late March.

“Refinancing of the maturing bonds will happen without any hurdles as the stimulus has unleashed ample liquidity in India’s financial markets,” said Ajay Manglunia, managing director and head of institutional fixed-income at JM Financial Products. “The pressures on lower-rated issuers to service debt have eased considerably since March when credit spreads had blown out.”

The policy measures have buffered the impact of the pandemic on smaller businesses and lower-rated borrowers that got mired in a severe cash crunch and faced heightened refinancing risks due to bloated debt maturities in 2020. Defaults on local-currency bonds by local firms, which peaked at 145 billion rupees in 2019, have slowed to 38 billion rupees so far this year, Bloomberg-compiled data show.

Still, investor demand for lower-graded firms’ debt hasn’t fully recovered after India’s shadow bank crisis made buyers more risk averse. About 66% of local-currency bond sales have been from those ranked AAA and AA+ during the current quarter, compared with around 55% before the collapse of infrastructure lender IL&FS in 2018 triggered turmoil in the banking sector, the data show.