When investing in corporate bonds, check the credit rating as well as credit ratio.
For participating in the fixed income securities market, mutual funds are the preferred vehicle. Having said that, investing directly in corporate bonds is an option, which can be explored by retail investors.
The bonds are listed at the Stock Exchange (NSE/BSE) but the segment is not liquid. Secondary market trades are negotiated mostly over the counter (OTC) i.e. not through the stock exchange trading screen. In the primary market, bond issuances happen mostly through private placement, which also are out of reach for retail investors.
In the secondary market, there are bond houses who make corporate bonds available in reasonable lot sizes to investors, which are not as large as in the wholesale or institutional secondary market. In the primary market, there are public issues happening, though much less than private placements. Best scenario for individual investors is to purchase in a public issue, of any ticket size as per suitability, and hold till maturity so that there is no need to gauge secondary market liquidity.
While investing in corporate bonds, the foremost aspect is the credit quality of the issuer. The gauge for credit quality is credit rating, where AAA is the best, followed by AA and so on. Credit rating agencies publish a gauge called credit ratio, which compares the upgrades with downgrades in that period.
In April to September 2022, Crisil’s credit ratio was as high as 5.52. There were 569 upgrades and 103 downgrades in this six months. The credit ratio for Icra in April to September 2022 was 3.3 and for rating agency Care it was 3.74. All these numbers, 5.5, 3.3 and 3.7 are significantly higher than the ballpark reference number of 1, where upgrades equal downgrades. Apart from the recent action of April-September 2022, there is an outlook as well.
The leading rating agency has expressed its opinion about the segments of NBFCs. Among the various sectors of NBFCs, the best outlook is on the gold loan NBFCs. These companies have a conservative loan-to-value ratio. Since people have an emotional connect with gold ornaments, they tend not to default on these loans. The next best outlook is for home loan NBFCs, followed by vehicle finance ones. Let us take a few illustrations on these upgrades.
Recently, Crisil upgraded Muthoot Fincorp from A+ to AA-. The upgrade is driven by improvement in capitalisation profile and expected improvement in the earnings profile of Muthoot Pappachan Group. It also mentions sound asset quality despite the pandemic challenges.
The credit rating of Shriram City Union Finance is AA from Crisil. That of Shriram Housing Finance also is AA from Crisil. Both these ratings have been placed under rating watch with positive implications by Crisil. In December 2021, the board of directors of Shriram Transport Finance Company, Shriram Capital and Shriram City Union approved the merger of the entities with Shriram Transport Finance. The resultant entity (post the merger) is expected to be renamed as ‘Shriram Finance’.
Further, Shriram Housing Finance, currently a subsidiary of Shriram City Union, will become a subsidiary of the merged entity, Shriram Finance. The credit rating of Shriram Transport is AA+ from Crisil. It is expected that the rating of Shriram Finance would as AA+ as well. This explains, though not in so many words from the rating agency, why these two ratings are under rating watch with positive implications.
Conclusion
As and when public issues hit the market, purchase is an easy process. The application process is online nowadays and the only requirement is that of a demat account. The gauge for the credit quality is the credit rating from the rating agency, and AA is high investment grade. The document called rating rationale, which gives the rationale why that particular rating has been assigned, is available on the website of the relevant agency. Referring to this would give some more insights.
Source: https://www.financialexpress.com/money/your-money-buy-corporate-bonds-in-a-public-issue/2777398/