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What makes debt market more dangerous in India than in the US

Prosenjit Datta     June 7, 2019

India never had a Junk Bond King like Michael Milken of the US who became famous for packaging high-risk, high-yield bond bundles and selling them. At the peak of his career in 1980s, he was reportedly earning hundreds of millions of dollars a year by creating a junk bond market. In 1989 though he got indicted for securities fraud and sentenced to several years in prison. After serving his sentence and coming out of prison, Milken had refashioned himself as a financial consultant and philanthropist.

However, as is becoming apparent, India does have a flourishing junk bond market though it never had someone like Milken to package it and sell it and popularise it. Also, they might be junk bonds in their characteristics, but they are not called that - instead they go by the far more staid name of high-yield bonds or high-yield debt. And the appetite for them has been quite high, as evidence points out.

There are of course some differences between Indian companies that issue them and the generally accepted class of junk bonds in the US. In India, quite a few high yield bonds were not considered particularly risky - the paper was largely issued by big, reputed brand names, and were often initially graded with triple A or equivalent credit ratings.

There were other kinds too - clearly high-risk bonds with low credit ratings that were issued, but most of these were generally marketed to overseas investors. These were high yield bonds that were recognised as high risk as well. A Reuters report suggests that issuance of such bonds by Indian companies in global markets hit a record high in 2019, the last peak being in 2014.

However, there is a crucial difference here. Quite a few of these bonds - which have varying tenures - have essentially been issued by very well-known and reputed companies in India. In many cases, they offer a higher yield to global investors but are still low cost funds for these companies as borrowing from the Indian market would have been costlier. One big commodity company and another big steel manufacturer raised big funds using this route. The sheer difference between Indian interest rates and interest rates in the US allows Indian companies to offer better yield, even after factoring in exchange rate risks, to global investors while still accessing cheaper funds than they would have otherwise.

But, it is the other kind of junk bonds that is far more interesting. These are bonds and papers issued by top notch corporate and banking and financial names, which turned sour almost overnight. There was a huge appetite for these bonds in the domestic market itself because these companies and organisations were considered too solid and too big to fail. Credit rating agencies were often behind the curve when it came to downgrading their debt. And in some cases, the rating downgrade happened only after a default had taken place or after the bad news about an impending default or a company's deteriorating finances came to light. In most cases, the credit rating of the debt went from triple A or equivalent to junk status overnight.

This is what has made the Indian corporate paper market so dangerous. Bankers, mutual funds and others who had happily subscribed to these papers under the impression that they were investing or loaning to rock solid securities found out one day suddenly that the paper had turned junk. Fitch, for example, has decided to downgrade the ratings for ICICI and Axis Banks to junk status. Zee group debt used to be considered gold plated because of the group's overall functioning until their infrastructure bets turned sour. Dewan Housing's chairman and managing director Kapil Wadhawan was considered a star manager till fairly recently because of the way he had grown the organisation - until the music stopped suddenly. IL&FS of course was in a class by itself - often considered a quasi government organisation and an infrastructure funding company par excellence until it came out that it had been fudging its accounts for a long, long time.

It is all these that makes the Indian debt market more dangerous than perhaps the bond market in the US. It will take some time before the current crisis settles down.

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