Unrated debt on the rise as investors seek higher yields

Mumbai: Unrated and little-known issuers have emerged as the second largest borrowers in the debt capital market this fiscal as investor appetite for higher yield, non-rated paper has improved. Between April and January FY26, they raised ₹1.5 lakh crore, up from ₹1.06 lakh crore in the same period last year.

Unlisted and unrated bonds attract investors mainly for higher yield and structuring flexibility. Issuers increasingly prefer unrated structures to avoid procedural delays, regulatory disclosures and the electronic book provider (EBP) route required for listed bonds. Listing also mandates credit ratings, adding compliance layers and time.

In volume terms, 1,783 issuers tapped the market under the unrated or not known classification this year, marginally lower than 1,800 in the corresponding period last year, with smaller and mid-sized borrowers increasingly accessing the capital markets.

“Unrated issuances shorten timelines and keep covenants confidential,” said a banker in the debt capital markets (DCM).

Private credit deals often involve raising money at coupons of 12-20%, depending upon the credit risk. For instance, Shapoorji Pallonji’s debt paper, which involved pledging its Tata Sons holding, was priced around 19%.

By contrast, corporates in the AAA rated category raise money around 7.7% – or about a percentage point higher than the sovereign benchmark yield.

AIFs & Private Credit
Unlike mutual funds, insurance companies and banks, which face regulatory constraints on investing in unrated instruments, private credit funds and Alternative Investment Funds (AIFs) have no such restrictions.

As a result, they have become the primary buyers of these deals.

There were several unrated issues this FY. For instance, Shivam Auto raised around ₹200 crore through an unrated structure backed by private credit investors.

Large groups such as Shapoorji Pallonji and Vodafone Idea have also raised money through unrated or privately structured deals in recent months.

Bilt Graphic raised funds through unrated papers from Allianz Group, DSP, Kotak Alternate Asset Management Limited Funds, and the Trust Group. Similarly, Embassy group raised funds from 360 One and the Family group, with affiliate lenders, in the unrated space. The rise in unrated issuances is partly due to demand from yield-seeking investors. With bank lending largely focused on rated corporates, more companies are opting for privately placed debt and structured instruments.

Hits & Misses
However, the trade-off is clear- lower liquidity and higher credit risk. The extra yield, as most of these borrowers raise money offering mid-teens returns, exists for a reason. Such investments are best suited for those with the ability to assess credit risk thoroughly. Private credit funds, HNIs and family offices are investors in unrated papers and assess the risks before investing.