After IL&FS crisis, suspicion running deep in bond dealers' minds

Public sector North Eastern Electric Power Corp Ltd (NEEPCO) on Monday called for bids to raise Rs 3 billion in seven-year bonds through the electronic bidding platform. It received bids worth Rs 135 million, asking for a coupon of 9.25 per cent.  

Last week, government-owned Rural Electrification Corp (REC) wanted to raise three-year 13-day bonds worth Rs 5 billion with a greenshoe option of another Rs 20 billion. It received bids worth Rs 5.8 billion at 9 per cent.

None of the issues took place. Sensing this, ONGC Petro Additions Ltd (OPAL) scrapped its plan to raise Rs 10 billion in bonds.

These were government-backed companies, with the highest rating on account of that. For private companies, any thought of raising money was futile.

Monday was also a day when not a single commercial paper issue took place, both in the private and public space. 

"I have never seen this in my life," said a senior bond arranger. 

However, after meeting the finance minister, the chairman of Life Insurance Corporation (LIC) said on Tuesday morning IL&FS would not be allowed to fall. Soon enough, Nabha Power, Gruh Power, Aditya Birla Finance and Aditya Birla Capital raised two months' money at 8-9.10 per cent. The confidence in the market seemed to have started returning. 

But still, there is suspicion in the air. 

A public sector undertaking raises two kinds of bonds, one for itself and another on behalf of the government. Generally, the market doesn't differentiate much between them because both are linked to the government.

But now, even for PSUs, holders are trying to replace the standalone ones with "government-serviced" papers. In the past one week, "government-serviced" papers are selling at a premium in the secondary markets.

Confidence issue

With IL&FS, an AAA-rated firm not so long ago, defaulting for the fifth time, the bond market is rattled. NBFC stocks, led by DHFL Ltd, again bled on Tuesday. And barring a few, not many are willing to invest in this liquidity-deficit market.    

Turbulence started after DSP MF tried to sell DHFL papers at a deep discount. There were hardly any buyers. The stock fell more than 60 per cent but recovered in the next trading session after the company clarified that it had enough liquidity. It again fell on Tuesday over 30 per cent.

"The liquidity issue has turned into a confidence issue," said Ramkamal Samanta, vice-president, investments, Star Union Dai-Ichi Life Insurance. "However, a coordinated effort by the regulators and the government can prevent the confidence issue from becoming a solvency issue," Samanta said. 

Just a wicket keeper

Fund managers say the IL&FS default will not snowball into a major contagion. But people would prefer to sit on their cash just yet.

"A fund manager is like a wicket keeper. No matter how many catches you take, just one miss and you are to be blamed for the defeat," said a debt fund manager.

"I know the good companies are not going to default. But I am not the one who would give them my money first," said the manager. 

Why such a state

"Most fund managers have been cautious about IL&FS for years now, and their exposure to it is much lower than that of banks and other asset managers," said Ananth Narayan, associate professor (finance) at the SP Jain Institute of Management & Research. 

Narayan quoted the Sebi data that show 90 per cent of corporate bond issuances in FY18 were rated AA or better. He agreed that the rapid downgrade of IL&FS from AAA to AA+ to BB to D, all in a matter of days, highlighted the need for review and introspection of the ratings process.  

The market also blames the Reserve Bank of India (RBI) and the government and their lacklustre communication skills. 

Knowing liquidity will dry up in September, the RBI did not provide adequate liquidity in the system. Only after the interbank market fell short of Rs 1.3 trillion did the RBI come up with its announcement of buying bonds from the secondary market.

Secondly, the RBI's drive to shake up private sector bank boards, and keeping mum about it, has made the market suspicious. The market is scared that there is a bad debt surprise waiting to be revealed in private sector banks. The chief executive officers of Axis Bank and YES Bank will be replaced despite the shareholders approving their re-appointment.

The five measures to shore up the rupee were so weak that the markets discounted the government's intention to fight the battle. 

The RBI was silent all along except for a one-line notification on Sunday that it, along with the capital markets regulator, was keeping a watch. 

"It should not be a contagion but it depends how authorities handle it," said Narayan.