Dip in non-investment grade paper marks improved balance sheets of firms

Category has lower share than before among rated instruments

Low-rated debt is in focus. The junk bond market in the United States (US) is rallying despite economic concerns. The premium investors seek for investing in debt that is more likely to default is shrinking in the US. In Europe, risky corporate bonds are in demand. In India, reports said there is a delay in payment for the country’s largest junk bond holder in May.

A credit rating reflects the chance that a borrower will default on the debt. Higher the rating, lower the chance of default. Risky companies’ debt below a certain rating are referred to as non-investment grade paper, or junk.

The share of debt in the non-investment grade category is declining in India, according to a Business Standard analysis based on the Centre for Monitoring Indian Economy’s (CMIE) numbers for companies in its Prowess database.

Non-investment grade category accounted for 7.5 per cent of total rated instruments in April 2020. It has steadily declined and was at 4.4 per cent as of April 2024.

The analysis considered the share of instruments in all categories on a rolling 12-month basis. The share of non-investment grade paper in the total debt touched its lowest in many years in early 2024, and hovers close to that level in the latest available April data as seen in chart 1 (click image for interactive link).

The biggest decline among non-investment grade paper is in instruments of default grade. Default accounted for 3.9 per cent of the total instruments in April 2020 and fell to 2.1 per cent as of April 2024. The share of risk-prone and those categorised as ‘inadequate safety’ has also declined (chart 2).

The trend may well reflect the improved balance sheets of Indian companies. 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 currently reflects an improvement for six months in a row (chart 3).

Rating agency commentary suggests the areas of distress include companies with an export focus, due to weak global demand.