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Riskiest India Firms Struggle to Sell Debt After Fund Shut

Divya Patil
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Banks Refusing to Lend Prompt $62 Billion Indian Rescue Deal

(Bloomberg) -- Just when India’s weaker companies need money the most amid the coronavirus pandemic, demand for their bonds is drying up.

Issuance of local-currency notes graded A+ and below fell to a nine-year low of 1.9 billion rupees ($25 million) in April. The spread on A rated three-year corporate bonds has jumped to a more than four-month high of 295 basis points.

Sentiment is weakening after Franklin Templeton, which was a big buyer of high-yield Indian securities, shut six debt funds late last month. The companies had already been struggling to raise money since 2018, when the sudden failure of major infrastructure financier IL&FS Group sparked a credit crisis.

Debt issuance is unlikely to get easier for them in the near future, according to Trust Capital Services, due to economic damage after India enforced the world’s largest stay-at-home restriction to prevent the spread of the virus.

“Investors such as mutual funds and banks had already started shunning investments in lower-rated corporate bonds as the Covid-19 situation raised doubts on debt-servicing capabilities of the companies,” said Sandeep Bagla, associate director at Trust Capital. “Franklin’s sudden winding-up of funds further worsened the sentiment to buy lower-rated debt, as the money manager was a flag-bearer of credit funds in India.”

India’s situation is contrary to global markets where junk bond sales are thriving after monetary authorities from the U.S. to Europe said they would buy such securities directly or accept such issuance as collateral from lenders. Reserve Bank of India also took a number of measures to improve the flow of credit to the nation’s small businesses, which form the bedrock of the $2.7 trillion economy. But, it has struggled to alleviate the funding pressure.

The central bank on April 17 announced a second round of targeted long-term repo operations amounting to 500 billion rupees. To make sure the money reaches weaker borrowers, it mandated banks to invest at least 50% of funds raised under this facility to small shadow lenders and micro finance firms.

But the offering failed to draw enough response from lenders, who are burdened with the world’s worst bad debt ratio. A similarly lackluster response was seen toward a financing lifeline for mutual funds.

(Updates with link to story on limits of central bank’s ability to revive market)

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