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.
TRACKING PERFORMANCE
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
2009
Universal individual identity (Aadhar) revolutionises KYC.
Our thorough, Vivriti way
Vivriti Asset Management has cracked the code to penetrate the Performing Credit space. Its best-in-class tech platform uses high-frequency data and internally developed models to monitor credit risk dynamically. Our uncompromising, in-person diligence process solves for the opacity of the unlisted market. The emergence of corporate digital records – GST, financial statements, pension payments, legal records etc., has added an incredible source to assess governance risk.
Assessment:
We spend two days at the workplace of with each potential portfolio company to understand them better. This is supplemented by our tech capabilities to entirely capture their digital footprint.
Structuring:
Principal protection, predictability and safety are key design elements of our funds. Every fund tightly limits the concentration in a single enterprise or segment, so that the risk is sharply reduced. Further, our funds are structured with the right incentive alignment for the manager.
Risk Management:
Consistent, stringent post-transaction monitoring, coupled with digitally enabled early warning signals, ensures that we stay on top of any emerging situation.
There’s a Vivriti fund that fits your need
