Junk papers share of total bonds value at 20-month high in July

The share of non-investment grade papers by companies hit five per cent of the value of total issuance in July, snapping a 20-month trend of sub-five per cent. This implied a bit of deterioration in the quality of papers.

A credit rating reflects the likelihood that a borrower will default on the debt. The higher the rating, the lower the chance of default. Debt of risky companies below a certain rating is referred to as non-investment grade paper, or junk. Non-investment grade instruments have a greater risk of default.

From December 2022 till June 2024, non-investment grade bonds accounted for less than five per cent of the value of total issuance.

The share of these bonds in the overall debt market has been on a downward trend in recent years, reaching its lowest point in early 2024. However, the share has been increasing since May 2024 and constituted five per cent of the total debt market in July 2024, according to a Business Standard analysis based on the Centre for Monitoring Indian Economy’s (CMIE) numbers for companies in its Prowess database.

This category accounted for 7.2 per cent of total rated instruments in July 2020 (chart 1).

The analysis considered the share of the value of the non-investment grade instruments in all categories on a rolling 12-month basis.

However, another parameter based on the number of junk papers implied an improvement in the quality of papers in July. The credit ratio showed an improvement. The credit ratio is the number of instruments that saw an upgrade for every downgraded one. A better ratio typically represents improved company financials. The ratio is an improvement trajectory, and is currently at a fourteen month high (chart 2).