Strong equity rally in highly indebted companies
Indian equities have been resilient despite covid lockdowns and broad market indices have risen from lows though not yet reaching peaks seen this year. However, specific stocks have seen very strong rallies and many of them have been from companies that have very high levels of debt. A few of them have been listed here.
Company | 1Yr Stock Return | Credit Rating |
CG Power & Indistrial Solution | 1451% | IND A1+ |
Godawari Power & Ispat Ltd | 740% | Care A(Stable) |
Jaiprakash Power Ventures Ltd | 380% | Crisil BBB-(Stable |
Tilaknagar Industries Ltd | 225% | - |
Kesoram Industries Ltd | 227% | - |
These stocks have rallied largely due to turnaround in business and some have them have gone through debt restructuring. The rally in these stocks indicate a turning business cycle and this could go on for a while. Bonds of these companies will get rerated from very high credit risk to moderate credit risk and even lenders having large exposure to debt can see their bonds get rerated.
Bonds with high credit risk find flavour
Bonds that carry high credit risk trade at much higher yields and spreads against bonds that carry low credit risk. Like in equities, when a stock is beaten down in valuations due to poor financial performance, bonds too see their value fall due to bad health of balance sheet. When financial performance turns, stocks with low valuations see rise in valuations from rise in the stock price. Bonds too see drop in yields and spreads when balance sheet health improves.
Identifying bonds with high credit risk that have potential to see fall in credit risk
Bond investors in an equity market rally start to search from "value plays", similar to equity value plays. Bonds that are trading at high yields and are rated junk or just above junk and bonds that are trading at high spreads as compared to peers, tend to come under the scanner of bond investors searching for. Value plays.
In order to identify high yield bonds that offer value, look for bonds trading at well over normal bond yields and then check their financial profile to see any signs of improvement. If the issuer is listed, check for equity price performance. If there is scope for improvement in financial profile and if equity price has rallied, high yield bonds can generate good returns from both yield and capital appreciation.
INRBonds quick invest has listed out high yields bonds for you to study and invest.
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