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IL FS default: Commercial paper issuances hit an 8-year low in Sept

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NEW DELHI: Defaults at ILFS and a spike in yields for papers of non-banking financial companies dealt a body blow to commercial paper issuances in September, which fell to the lowest in numbers since 2010.

Prospective issuers with lower credit ratings moved away from the short-term debt instrument in search for alternative arrangements. At 141, commercial paper (CP) issuances in September were lowest since June 2010, data compiled from PRIME Database suggests.

The number of issuances was way lower than an average of 630 issuances seen in the first eight months of 2018.

This was the first month since August 2013 (174) when CP issuances were lower than 200. In value terms, Rs 28,470 crore of issuances came out in September – the worst since September 2013 (Rs 20,867 crore).

This was in steep contrast to the record high of Rs 1,76,051.39 crore issuances seen in August, 2018.

The average for CP issuances in the first eight months stood at Rs 87,536 crore.

Yields have shot up quite a bit.

At these yield levels, most NBFCs would not want to borrow from the commercial paper market, said Ashish Shanker, head of investment advisory at Motilal Oswal Private Wealth Management. In last 6-9 months, when liquidity was tight, NBFCs relied mainly on commercial papers and CP borrowing from mutual funds jumped 37 per cent in the first five months of FY19. Brokerage Nomura India said CPs accounted for 25-30 per cent of incremental funding for NBFCs in last two years. But yields jumped as DSP sold Rs 200-300 crore worth of DHFL commercial papers at a discount, which stoked rumours of a systemic liquidity problem in the NBFC space.

Defaults at ILFS made matters worse. DHFL has proposed to reduce exposure to CP as part of overall borrowing plan and increasing hedging activity.

“The market is a bit nervous and illiquid.

Quality institutions may not find it difficult to borrow, but for smaller ones, yields have risen to 10-5-11.5 per cent levels.

At these yield levels, NBFCs with ALM issues would come to the commercial papers market only if they fail to make some alternate arrangements with their bankers,” Shanker said. Analysts insist there was enough demand for good quality commercial papers among mutual funds, which hold Rs 18 lakh crore in debt assets.

It is estimated that mutual funds have deployed 17 per cent of their debt AUM in NBFCs. Shanker expects the momentum to pick up soon as open market operations by RBI ease liquidity concerns, and reports suggesting that the government plans to supersede the ILFS board and take over the company, a move that can boost investor confidence.

Some estimates suggest some 292 open-ended debt funds, as many as 18 schemes, had exposure to debt papers from the ILFS group.




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