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High-yield corporate bonds offer 10% to 14% per annum. AAA-rated bonds offer 7% to 8%. That gap exists because the issuer carries more credit risk. So how do you get a sense of that risk before putting money in?
There’s no single number that tells you everything. But there are specific things you can check.
Credit Ratings: Where to Start
CRISIL, ICRA, CARE and India Ratings assess bond issuers in India. They assign ratings that reflect the issuer’s ability to repay.
| Rating | What it signals |
| AAA | Highest safety, lowest default risk |
| AA | High safety, low default risk |
| A | Adequate safety, moderate risk |
| BBB | Moderate safety, higher risk |
| BB and below | Elevated default risk |
Ratings have two things worth checking beyond the grade itself.
First, the date of the last review. A rating from 14 months ago may not reflect what’s happening now. Rating agencies publish the review date alongside the rating.
Second, the rating outlook: Stable, Positive, or Negative. A BBB bond with a Negative outlook is a meaningfully different bet from one with a Stable outlook.
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Cash Flow Ratios: What Ratings Don’t Show
Ratings are based on information at the time of the last review. Two financial ratios give you a more current read on whether the issuer can service its debt.
Debt-to-Equity Ratio
How much the company owes compared to what it owns.
- Lower ratio: less leverage, more buffer if revenues fall
- Higher ratio: more dependent on borrowed money, less room to absorb shocks
Interest Coverage Ratio
How many times can the company pay its annual interest from operating profit?
| Coverage | What it signals |
| Above 3x | Comfortable capacity |
| 1.5x to 3x | Manageable, worth watching the trend |
| Below 1.5x | A small income drop creates pressure |
Both ratios are in the issuer’s annual report and the bond’s information memorandum.
Sector Matters as Much as the Rating
An A-rated NBFC that borrows wholesale and lends retail sits in a very different risk position from an A-rated power transmission company with a 25-year contracted off-take. The rating doesn’t separate these two.
Sectors that have seen more stress in India’s bond market:
- Real estate developers: income depends on project completion and sales velocity
- Wholesale-funded NBFCs: vulnerable when credit markets tighten
- Infrastructure developers: long gestation, often dependent on government receivables
- Commodity-linked companies: revenues swing with global prices
Sectors with more predictable cash flows:
- Power transmission with long-term PPAs
- Toll roads with traffic guarantees
- Government-backed PSUs
Ask whether the issuer’s income is contracted or discretionary. That one question filters out a lot of risk.
What Backs the Bond if the Issuer Defaults
Your recovery in a default scenario depends on the type of charge.
| Charge Type | What it means |
| First charge | Your claim on assets ranks above other lenders |
| Second charge | At least one lender ranks ahead of you |
| Pari passu | You share recovery equally with other bondholders |
| Unsecured | No specific asset backs the bond |
In the same defaulting company, a first-charge bondholder and an unsecured bondholder often see very different recovery amounts. The charge type is in the term sheet under the Security section.
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Signals That Often Appear Before a Downgrade
Rating downgrades usually lag the actual deterioration. These are worth watching:
- Negative outlook or rating watch: Agency is actively reviewing for a downgrade
- Auditor qualifications: Red flags in the annual report footnotes
- Promoter pledging shares: Often indicates holding company stress
- Repeated debt rollovers: The company isn’t repaying, just extending tenure
- Sector-wide tightening: Policy changes or liquidity stress affecting the whole industry
A Quick Checklist Before You Invest
A credit rating is a starting point, not the full picture, here’s where to look for each factor before you invest.
| What to verify | Where to find it |
| Rating and date of last review | CRISIL, ICRA, CARE, or the India Ratings website |
| Rating outlook | Rating rationale document |
| Interest coverage ratio | Annual report or information memorandum |
| Debt-to-equity ratio | Annual report |
| Charge type | Term sheet, Security section |
| Sector conditions | Rating agency sector reports |
| Any active rating watch | Rating agency website |
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FAQs on Default Risk in High-Yield Bonds
It’s the chance that the issuer misses an interest payment or doesn’t return your principal at maturity. High-yield bonds carry more of this risk, which is why they offer a higher coupon.
Ratings from CRISIL, ICRA, CARE and India Ratings are a useful starting point. They can lag actual conditions, though. Several NBFC and real estate bonds held investment-grade ratings close to the time of default in 2019-2020. Always look at the rating date, the outlook and what’s happening in the issuer’s sector.
It shows how many times an issuer can pay its annual interest from operating profit. Above 3x suggests the company has room to absorb setbacks. Below 1.5x, a small drop in income can make repayment difficult.
Yes. Ratings reflect conditions at the time of the last review. If things change quickly, the rating may not catch up immediately. Checking financial ratios and sector news alongside the rating reduces this blind spot.
he bond’s information memorandum has the key numbers. The issuer’s annual report is on their website or the MCA portal. Rating agencies publish detailed rationale documents for every rating they assign, including financial metrics and sector commentary.
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Disclaimer:
Fixed returns do not constitute guaranteed or assured returns. Investments in corporate debt securities and municipal debt securities/securitized debt instruments are subject to credit risks, market risks, and default risks, including delay and/or default in payment. Read all the offer-related documents carefully. This blog/article should not be construed as financial advice or as an offer or recommendation to buy or sell any security or any products/services of/on GoldenPi or any product/services of its third-party client(s). For a detailed calculation of YTM, visit our website. T&C’s Apply.
