What is Performing Credit?
India’s corporate bond market – US$ 500 billion in size – is currently crowded with AAA and AA rated bonds, accounting for over 90% of outstanding bonds. AAA and AA bonds may be considered safe but generate negligible inflation-adjusted yields.
Below AA ratings therefore, a significant opportunity exists. This space – we call it Mid-Market Performing Credit – is highly under-penetrated and lacks adequate discovery. The issuers are operating companies ranging from unrated to ‘A’ rated, borrowing at steep rates. Over the last decades, banks, mutual funds and NBFCs have not been able to address the requirements of debt capital of these companies.
Vivriti has, over the last 3 years, launched seven highly differentiated performing credit funds and raised Rs 20 billion of risk appetite. These funds aim to meet investors’ appetite for returns in excess of debt mutual funds, while tightly controlling risk.
How big is the Mid-Market Performing Credit opportunity?
India’s bond market is valued at over US$ 2 trillion, with government issued debt taking up three quarters of the market. Of the balance, the top 10 issuers accounted for 40% of the corporate bond market over the last decade. Further, with declining market risk appetite over the last three years, the market became highly skewed towards AAA and AA securities, which comprised ~93% of all issuances.
Over the last decade, the number of “small issuers” (issue size < US$ 1.3 million) has increased at a faster rate (5.5 times) than other issuers, but they witnessed a lower increase in deal volumes (comprising only 0.3% of issuances). In comparison, “larger issuers” (issue size of >$13 million) comprised 96% of all issuances.
There is huge demand-supply imbalance in India’s Mid-Market Performing Credit market. Over 20,000 enterprises, with reasonable disclosure and governance standards, find it difficult to raise debt.
The total outstanding debt to such enterprises is US$ 100 billion. However, this translates to less than US$ 7 million per enterprise. Such enterprises operate at less than 0.5 times debt / equity ratio (debt / equity ratio for large corporates exceeds 2.5 times).
Hence, it is clear that there is a very large opportunity in the Indian Mid-Market Performing Credit space.
So why isn’t everyone investing in these companies?
It’s not that simple.
DISCOVERY IS TOUGH
It takes extensive outreach to identify the right companies. Acquiring detailed, updated information on such companies is harder.
PERCEIVED RISK IS HIGHER
Since these companies are not AAA, not listed and not necessarily in urban centers, outsized concerns on governance and risk persist.
SCALE IS A PROBLEM
These companies require credit of the order of US$ 1-25 million, too small for large investors to take the effort to diligence and monitor.
Monitoring far flung, private companies is a challenging task. This needs expertise, field diligence and technology investments, quite unlike mainstream debt investments.
The tide is turning for the credit market now
Universal individual identity (Aadhar) revolutionises KYC.
Alternate Investment Fund regulations open up the entire performing credit market to investors.
E-KYC (fool proof and near instant identification) enabled for businesses.
A new Companies Act improves ‘ease of doing business’ and governance standards.
New FPI Regulations
Makes investment in India easier for international investors.
A leap towards financial inclusion with 10 new Small Finance Bank Licenses.
PMJDY A Financial Inclusion Program reaches out to the unbanked.
The long awaited Insolvency and Bankruptcy Code is promulgated.
Digital payments get a massive boost from domonetisation.
Introduction of a uniform Goods & Service Tax seeks to bring thousands of small businesses into the mainstream.
Court judgments strengthen lenders’ hands on enforcement of promoter guarantees. The courts also uphold the bankruptcy remoteness of securitised debt instruments.
Scroll to see more
Click on the scroll line to view more
Our thorough, Vivriti way