Demand up for bonds with rating-cut protection

MUMBAI: Investors in India’s local-currency notes are demanding more protection than ever as the world’s worst Covid-19 wave threatens the outlook for businesses.

Bondholders are piling into rupee-denominated debt whose interest increases every time the notes’ credit ratings are downgraded.

Issuance of such bonds has jumped to a record 462.2 billion rupees (Us$6.3bil or Rm25.93bil) so far this year, compared with 251.5 billion rupees (Rm14.19bil) a year earlier, Bloomberg-compiled data show.

An example is debt sold in May by Godrej Industries Ltd, part of one of India’s oldest conglomerates.

Those AA rated securities have a clause that the 6.92% coupon would be raised by 25 basis points for each step of a rating downgrade below AA-, though the interest moves back to earlier levels if it’s upgraded again; there have been no rating changes since issuance.

These bonds with so-called credit rating protection metrics can benefit issuers as well in some cases; that’s because just as they promise to pay more in case of a downgrade, some notes let companies lower coupons if their bond grades are raised.

Massive stimulus has helped boost upgrades to 131 versus 128 downgrades this year based on Crisil Ltd ratings.

That’s better than a year earlier when it was 237 versus 984 But concerns are spreading again.

India’s central bank last week joined economists in cutting the nation’s growth forecast for this financial year to a single digit from double digits previously.

In India’s onshore debt market, fewer borrowers are seeking bids this week for rupee bonds after strong issuance last week left little in the pipeline.