Icra warns of rollover risks as CP issuers lower tenors

Rating agency Icra has warned of possible rollover risks with the reduction in commercial papers (CP) tenors by the issuers, amidst growing volumes, which have touched a life-time high of Rs 5.29 trillion in the first quarter of the 2016-17.
"The issuers and the investors need to be mindful of the potential rollover risks with the reduction in CP tenures, amidst growing volumes," Icra senior vice president and co-head for financial sector Karthik Srinivasan said in a report today.
The main investor class has shifted to the shorter maturity CPs, given the regulation for marked-to-market implications for all investments with residual tenures of over 60 days.

Report of month-end holdings by MFs indicate that the proportion of investments in CPs, with residual maturity of under 90 days, has increased over the last few quarters to 87 per cent as of June 2016 from 82 per cent as of June 2015 and 79 per cent as of June 2014.
Mutual funds, with a market share of around 65-70 per cent, remain the main investor segment in CPs, followed by banks, which account for 20-25 per cent.
Total asset under debt-oriented MFs was around Rs 9.7 trillion as of end July 2016.

Mutual funds have been investing around 20-25 per cent of their assets in CPs over the past few quarters.

With the revision by Sebi on single party, group and sectoral caps on investments by MFs with effect from January 2016, investments in CPs issued by NBFCs have come down over the last two quarters on an absolute as well as a proportional basis, while the investments in CPs of corporates have increased steadily as more players increased issuances to manage their funding requirements, notes the report.
Srinivisan said the CP market, however, is expected to grow in the near term and will remain an attractive source of funding for better-rated corporates in the current environment of ample adequate systemic liquidity, sound inflows into key investor segments and structural inability of banks to sharply reduce their lending rates.