Corporate bond market awaits partial credit enhancement rules

New guidelines will benefit corporate bond market, with many new issuers tapping it

Final guidelines are expected soon for banks to provide partial credit enhancement to bonds issued for funding of infrastructure projects by companies or special purpose vehicles.

This is expected to benefit the corporate bond market, with many new issuers tapping it. The draft guidelines were issued by the Reserve Bank of India in May, for comment by end-June.

The draft said the plan was to allow banks to provide credit enhancement up to 20 per cent of the entire bond issue. It could also be done by improving the rating of bonds by two notches and the limit on partial enhancement would be set at whichever of the two was lower.

“Certain investors have broad instructions to not subscribe to bonds below a particular rating. With credit enhancement by banks, the rating will improve and these investors will be able to subscribe to these bonds,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities. With the final guidelines, issuers will not have to wait for their financials to improve and then come to the market to raise funds. For, with credit enhancement, the company's rating would go up.

The corporate bond market is presently dominated by issuers with 'AAA' and 'AA+' credit ratings, considered the safest bet. These issuers are able to satisfactorily negotiate their coupon rates. Companies with lower credit ratings pay a higher coupon rate and still struggle to get investors for their bonds.

Experts caution that investors should be careful in so investing. “If it is just a one-time increase in rating, it will only mean that in case of a default, the investor will lose less money. That is not very attractive,” said Badrish Kulhalli, head of fixed income at HDFC Life.

Currently, the corporate bond market lacks depth and liquidity. So, companies have to depend on bank financing for infrastructure projects.