India Ratings and Research (Ind-Ra) has published the first edition of its quarterly Commercial Paper (CP) Market Dossier. The report encompasses the trend and dynamics of CP issuances in the latest quarter, overview of CP rates, liquidity assessments of Ind-Ra rated issuers, and any potential risks.
The 1QFY22 trend suggests that the market has shown resilience amid the uncertain period of the second covid wave. Moreover, on the longer-term basis, the rising number of issuers in a month suggests broadening of the market, though there is a concentration risk pertaining to the tenor of borrowings.
There has also been a meaningful improvement in the risk appetite of investors, which has enabled issuers rated A+ and below to access the market. The premium for these issuers has been significantly higher than higher rated ones, reflecting the risks of illiquidity in the market for trading/refinancing such instruments. While these are positive signs for the development of the CP market, this needs to be sustained over interest rate and credit cycles to benefit issuers lower down the credit curve.
Lumpy Issuance by NBFCs & HFCs in June: The overall dynamics in the CP market appears to be encouraging. The market has shown resilience during the second covid wave, as reflected in issuances by corporates and associated risk premia. Though corporate issuances were resilient in that period, issuances by non-bank finance companies (NBFCs) and housing finance companies (HFCs) dropped considerably. Though the June data show NBFC and HFC issuances have recovered to pre Covid-19 level, this has largely been contributed by lumpy issuances by the AAA rated NBFCs and HFCs.
The agency believes that the market seems to be pricing some uptick in short-term rates, owing to changes in growth-inflation dynamics. The market is conscious about the sharp rise in inflation and encouraging corporate activities amid the lockdowns. Ind-Ra in its commentary External Demand & Improved Balance Sheets Mitigate Risks Arising from Localised Lockdowns published its initial impact assessment of the second covid wave and highlighted that corporates are better prepared for the second wave. The agency believes that even if a third wave transpires, by and large corporates are well prepared to manage the situation, given the use of localised lockdowns.
However, uncertainty will continue till the time a large part of the population is vaccinated, though issuers have benefited from their experience and are better able to manage operations and cash flows. The agency believes some moderation in margin on account of higher commodity prices and the subsequent impact on cash flows cannot be ruled out. which could deteriorate further in case the disruptions are more.
Market Dynamics: Overall, corporate issuances have exhibited a rising trend; average monthly gross issuances amounted to INR0.7 trillion in 1QFY22 (4QFY21: INR0.6 trillion). On an average, 70 corporates and 50 NBFCs/HFCs tapped the CP market in 1QFY22 (4QFY21: 70 and 60, respectively). Interestingly, the corporate issuances are now around two-thirds in terms of volume, compared to one-third in the last decade.
The liquidity framework adopted by the Reserve Bank of India along other regulatory interventions have catalysed the market development. These have rationalised credit and term risk premium for high rated issuers along with a surge in demand for CPs.
CP plays a significant role in short-term financing, especially for financial institutions where asset-liability synchronisation is a critical day-to-day activity. A healthy short-term funding market does provide a fillip to the overall growth of the economy and enables better access to funding for people at the bottom of the pyramid. Nonetheless, a sudden stop or adverse conditions in the market can transpire into an abrupt rise in borrowing costs in the system, and worst case could result in credit events.
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