Banks cautious about short-term papers

This is because in the last couple of months fresh instances of defaults have been reported

Amid the economic slowdown, investors, especially banks, are being cautious when it comes to exposure to commercial papers (CPs). This is because fresh cases of defaults on this front have been reported in the past couple of months. A year ago, Hindustan Construction Company and Deccan Chronicle Holdings had defaulted on CP repayments.

CPs are short-term debt instruments, issued by companies to finance working capital loans. Of late, CP rates have risen, following the Reserve Bank of India (RBI) increasing the repo rate by 25 basis points last month.

Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities, said: “Earlier, all nationalised banks aggressively invested in CPs. Since the last one year, banks have been cautious with CPs because they do not want to invest in those whose rates are below their lending rates; also, banks want to play safe. CPs are used by companies to bring down their cost of funding.”

Issue arrangers said a large pharmaceuticals company whose domestic business was acquired by another one for Rs 2,000 crore about two months ago had also defaulted on CP repayment.

Recently, Aditya Birla Nuvo raised about Rs 100 crore through 8.62 per cent CPs maturing on March 31, while L&T Finance’s one-month, 8.68 per cent CPs were aimed at raising Rs 100 crore.

“We have exposure to CPs of only large companies — either ‘AAA’ rated or those that have had a long presence in the market. We are not going very aggressively with CP exposure because of the economic slowdown,” said Dwijendra Srivastava, head of fixed income, Sundaram Mutual Fund.

Typically, CP issuances pick up in the fourth quarter (January-April). But this year, only ‘AAA’ and ‘AA+’ rated CPs are finding takers. ‘AAA’ is the highest rating assigned by credit rating agencies and signifies a company has strong capacity to meet financial commitments.

“There may be five-six companies that defaulted on CP repayments in the last two-three months,” said an issue arranger.