Simple debt instruments have become investors’ favourite compared with complex and highly complex instruments. This has been revealed in a Crisil analysis of debt issuances between December 2008 and January 2009. This trend seems to be an extension of a shift in the composition of debt issuances first observed in November 2008, when there was a dramatic decline in complex and highly complex issues.
According to the analysis, Crisil has classified financial products into three categories — simple, complex, and highly complex — based on the ease of identifying and understanding risks.
Simple instruments largely comprise commercial paper (CP), certificate of deposit (CD) and fixed coupon non-convertible debentures. In the two months, complex instruments almost entirely consisted of floating and fixed rate debentures with put and call options, while highly complex instruments were equity-linked debentures. The apparent investor preference for simple instruments is probably due to the continuing uncertainty in the financial markets, according to the report.
According to the data analysed by the rating agency, a total of 233 debt instruments were issued in December and 150 in January. A majority of instruments issued in December (68 per cent) and January (83 per cent) were simple instruments, in line with the mix observed in November (82 per cent).
Interestingly, the relatively sophisticated complex and highly complex instruments made a modest recovery in December with their share rising to 32 per cent from 18 per cent in November.
But they declined again in January this year to levels observed in November 2008.
According to S Venkataraman, senior director, Crisil Research, “The lower total debt issuances and as well as the high share of simple instruments in January may be partly due to the prevalent expectations that interest rates would decline further.”
