As a prudent investor, it is essential to include investment-grade bonds in your portfolio. Governments or well-established companies typically issue these bonds with a low probability of defaulting on their debt obligations.
Unlike non-investment-grade bonds, also known as junk bonds, investment-grade bonds are considered safer as they carry lower risks of default. Therefore, they provide a reliable source of income while preserving your capital investment.
Are you curious about how investment-grade bonds or any bonds are rated in India? The process is handled by credit rating agencies like CRISIL, ICRA, CARE, and others.
Let’s explore the world of investment-grade bonds, their ratings, and why they hold significant importance in the Indian market.
What are Investment-grade Bonds?
Investment-grade bonds are high-quality bonds that have been rated BBB or higher by credit rating agencies. They are issued by companies or governments that have a low risk of defaulting on their debt obligations.
Typically, investment-grade bonds are issued by entities with a stable financial position, a strong history of debt repayment, and a low likelihood of going bankrupt.
Investors seeking a secure investment option often turn to investment-grade bonds, also commonly called IG bonds. While these bonds may provide a lower yield compared to non-investment-grade bonds, they are known for carrying a significantly lower risk of default.
This makes them a desirable investment for those who prioritize steady income over high-risk, high-reward opportunities. Overall, investment-grade bonds provide stability and reliability, making them an attractive option for risk-averse investors or retirees seeking to safeguard their valuable savings.
Credit Ratings of Investment-grade Bonds
Investment-grade bonds are rated by credit rating agencies like CRISIL, ICRA, CARE, etc. based on their creditworthiness. These agencies evaluate the financial position and credit history of the issuer, among other factors, to assign a credit rating to the bond. This rating reflects the probability of the issuer defaulting on their debt obligations.
Briefly,
- Credit ratings range from AAA, which represents the highest quality, to D, which represents the lowest quality.
- Investment-grade bonds are rated AAA to BBB, with BBB being the lowest and AAA the highest.
- AAA- rated Bonds have the highest quality with the lowest risk of default.
- AA- rated Bonds are of high quality with a very low risk of default.
- A- rated Bonds have an adequate degree of safety with a low risk of default.
- BBB- rated Bonds are medium quality with a moderate risk of default.
Impact of Investment-grade Bond Ratings on Bond Yields
When you invest in a bond, the bond yield is the return you earn on your investment. For the issuer of the bond, the bond yield is the cost of borrowing. The credit rating of a bond affects its outcome. A higher bond rating means a lower yield because highly-rated bonds are considered less risky. On the other hand, non-investment-grade bonds are riskier and more speculative, so they offer a higher yield.
For example, a 10-year government bond which is said to have a sovereign rating may have a bond yield of 7.06%, but a 10-year BBB corporate bond may offer returns ranging approximately from 11-12% per annum. It is important to emphasize that a rating downgrade can have significant implications, particularly when it comes to the borrowing cost for the issuer.
When a bond issuer’s credit rating is downgraded by credit rating agencies, it signifies that the issuer’s creditworthiness has weakened. This downgrade indicates a higher level of risk associated with lending money to the issuer.
As a result, the borrowing cost increases compelling the issuer to pay a higher interest rate to attract investors. The rationale behind this is to compensate investors for taking on greater risk by investing in bonds with a lower credit rating. The impact of a higher borrowing cost can be substantial for the issuer. It not only affects their ability to access affordable financing but also adds to their financial burden.
Latest Investment-grade Bonds
Over the past few years, a notable increase in the issuance of investment-grade bonds has been observed in India. Both companies and governments are resorting to the bond market to gather funds for their operations. Some of the investment-grade bonds which are currently available on TheFixedIncome.com platform are as follows:
1.Indostar Capital Finance Limited
Rating- AA-
Coupon- 9.95%
Maturity- September 2024
2. Fincare Small Finance Bank Ltd
Rating- A Positive
Coupon- 10.75%
Maturity- December 2028.
3.TATA Capital Financial Services Ltd
Rating- AAA
Coupon- 9.17%
Maturity- March 2026
The latest CRISIL report on rating actions in the investment grade category provides valuable insights into the performance and stability of various entities for the period of October 2022 to March 2023. The report shows an assessment of rating downgrades, defaults, and the overall landscape of the investment grade category.
| Sharp rating actions in the investment grade category (Oct 2022 – Mar 2023) | |
| (including non-cooperative issuers) | |
| Rating Action | Number of ratings |
| (Count) | |
| Number of rating downgrades of more than or equal to 3 notches | Nil |
| Number of downgrades to default from investment grade ratings | Nil |
| Number of outstanding ratings as on March 31, 2023 | 868 |
Source: CRISIL
The absence of rating downgrades and defaults showcases the robustness of the entities issuing investment-grade bonds. If you’re interested in investing in investment-grade bonds, you must consider the latest bonds available on TheFixedIncome.com. Nevertheless, it’s crucial that you conduct comprehensive research and analysis before investing in any bond. Only by doing so can you fully comprehend the issuer’s financial standing and creditworthiness.
Significance of Investment-grade Bonds in India
Companies and governments in India rely on investment-grade bonds to raise funds for their operations. They are ideal for financing large-scale projects like infrastructure development etc. that require substantial investment.
Investors seeking a secure and stable investment option often turn to investment-grade bonds. Investment-grade bonds offer a dependable source of income and have a lower chance of default compared to non-investment-grade bonds.
In India, debt mutual funds commonly include investment-grade bonds in their portfolio, making them a crucial component. These funds offer a steady income and are generally considered less risky than equity mutual funds.
Conclusion
In India, investment-grade bonds are a great investment choice. They provide a stable source of income and have a lower risk of default compared to non-investment-grade bonds or junk bonds. Many investors prefer investment-grade bonds for their safety and stability.
Credit rating agencies like CRISIL, ICRA, and CARE etc. rate investment-grade bonds based on their creditworthiness. These ratings indicate the probability of the issuer defaulting on their debt obligations. Investment-grade bonds are rated from BBB to AAA, with AAA being the highest rating.
Although investment-grade bonds are a generally safe investment choice, it’s important to keep in mind that they’re not entirely risk-free. A bond’s credit rating may change over time depending on the issuer’s financial situation.
A company or government that was previously deemed financially stable may experience financial difficulties in the future, resulting in a credit rating downgrade.
Investors should also be mindful of interest rate risk when investing in investment-grade bonds. If interest rates increase, the value of existing bonds may decline, which could negatively impact the bond portfolio’s value.
Nevertheless, this risk is considerably lower for investment-grade bonds in comparison to non-investment-grade bonds.
To sum up, investors seeking a secure and stable income stream should have a good understanding of investment-grade bonds and their ratings. Credit rating agencies significantly influence the bond yield of investment-grade bonds.
The Fixed Income experts can assist investors in making informed investment decisions by providing insights on the nuances of investment-grade bonds and the latest bond offerings available and helping them create a diversified bond portfolio.
Our guidance can help investors better understand investment-grade bonds and make informed investment decisions.
