Complex debt issues dip by 80%
Market meltdown, cash crunch take a toll on exotic products in November: Crisil.
Troubled equity markets and a tight liquidity condition have put brakes on issuance of highly complex instruments like equity-index-linked debentures and pass-through certificates (PTCs).
Complex debt issues declined by 80 per cent in November, according to a Crisil study.
“The relatively-sophisticated complex and highly-complex categories accounted for more than 60 per cent of the 139 instruments issued in October 2008. However, the share of these categories plunged to only 18 per cent of 83 debt issuances in November 2008. This can largely be attributed to uncertain financial market conditions, with a meltdown in the equity market, tight liquidity in the debt market and a cautious approach to credit by lenders, given the expectation of an economic slowdown,” said Crisil.
“These trends are clearly linked to market factors. With the fall in equity prices, equity-index-linked debentures have lost popularity with high networth individuals (HNIs), who have probably shifted to simpler instruments. Moreover, demand for pass-through certificates has all but dried up with debt fund launches slowing in the face of heavy redemptions,” said Crisil Managing Director and CEO Roopa Kudva.
In October, 47 per cent of the issuances of highly-complex instruments accounted for equity-index-linked debentures, while PTCs related to securitisation transactions accounted for 45 per cent of the issuances. Equity-linked debentures are mainly targeted at HNIs and the main investors in PTCs are mutual funds.
The categorisation of these instruments is according to Crisil Complexity Levels, a pro-bono service by the agency that categorises financial products by the ease of identifying and understanding their risks.
In November, very few highly-complex instruments were issued. About 85 per cent of the complex securities and 100 per cent of the highly-complex ones were issued by financial sector entities, whereas simple instruments were issued mainly by manufacturing and service sector companies and government-linked entities, including public sector banks. Simple debt issues mainly comprised commercial paper, certificates of deposit and non-convertible debentures with fixed coupons.