In This Issue:
- Editor’s Column – Are MFs Getting too Aggressive on Credit Risk?
- IL& FS Transport Rating Downgrade
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – Are MFs Getting too Aggressive on Credit Risk?
The falling INR has impacted credit markets the most. FIIs have been continuously selling INR Bonds for the last six months, leading to sharp rise in bond yields across the curve. 3, 5 and 10 year AAA corporate bond yields have backed up by 94bps, 91bps, and 69bps respectively in the current year 2018 and are trading at levels of 8.54%, 8.65% and 8.59% respectively and the levels over the repo rate are in the range of 229bps to 240bps. At these levels of Carry, corporate bond yields are factoring in a huge risk premium.
12 months CPs & CDs are trading at attractive spreads over the 12-month T-bill. 12 months CPs & CDs are trading at levels of 8.48% and 8.00% respectively while 12 months T-bill is trading at 7.23%, giving a spread of 125bps and 77bps respectively.
Given that AAA yields and money market credit yields are at over 8% levels, the attractiveness of credit risk funds is diminishing as spreads to AAA funds are just around 100bps to 150bps and credit risk funds carry higher expense ratios and have exit loads as well. In this scenario, mutual funds are trying to up the portfolio yields of credit risk funds and by doing so, they may be getting too aggressive in their Search for Yields.
Looking at portfolios of top four credit risk funds in terms of AUM, we find that portfolio yields range from 9.50% to 10.9%, for almost similar duration portfolios. The wide differential in yields is explained by the proportion of lower rated papers in each fund. Table 1.
Currently credit risk funds are offering YTM of 9.50%-10.92% (Table 1), with average maturity of 1.9 years to 2.5 years. Credit risk funds are largely buying lower (AA, A, BBB ) rated papers. Credit risk funds also have some exposure to unrated papers.
Credit risk funds in India are not similar to junk bond funds in the US as in India, investors have very low appetite for credit risk and invest in credit risk funds on the basis of an implicit guarantee that the AMC will protect them from defaults, which has happened in a few cases in the past. Going too aggressive on credit riak may open funds to more credit events that cannot be bailed out as size of funds have become large.
Investors are better off studying credit fund portfolios and if they do not have appetite for credit risk, they are better off in high safety funds that are now offering attractive portfolio yields.
We have space where transactors can place their Bids or Offers for High Yield Bonds.
Please do send your comments to email@example.com on this newsletter, which will help us better the offering as we go along.
IL & FS Transport (ITNL) Rating Downgrade
- Rs. 20 billion NCD downgraded to BB (Outlook- Negative) from A-
- Rs. 10 billion CP downgraded to A4 from A2+
- Rs. 30 billion NCD is rated AA+ (with negative implications) as it is backed by a DSRA (debt service reserve account) support undertaking from IL&FS Limited (AAA rated)
- ITNL SPVs reported irregularities in debt servicing in June 2018 due to which credit rating is downgraded
Recently IL & FS transport (ITNL) credit rating (NCD for Rs 20 Billion) was downgraded by ICRA, NCD rating was downgraded to BB (below investment grade) from A- and CP rating was downgraded to A4 from A2+. Credit rating agency Brickwork also downgraded CP rating to A4 from A2+.
Rating was downgraded after four of ITNL SPVs reported irregularities in debt servicing in June 2018 while one utilized debt service reserve (DSR) for the interest payment for the month of June 2018. Historically ITNL has supported its SPVs for servicing of debt however, ITNL did not extend the support which translated into the delay in debt servicing by the SPVs. ITNL has also initiated termination of contracts for their respective infrastructure projects.
On a consolidated basis, the overall gearing as on March 2018 has reached to 7.21x times from 6.79x times as on March 2017. ITNL has generally relied upon debt for extending funding support to its SPVs. Management of ITNL in the past had indicated about the deleveraging plan either through stake sale in the SPVs or through equity infusion, however, either of these are yet to materialize.
ITNL also has a substantial amount (more than Rs 50 billion) of claim pendency According to the company, the accumulated claims are either for cost overrun arising primarily from delay in handover of ROW (right of way is a type of easement granted or reserved over the land for transportation purposes) or due to change in scope of work. ITNL was to receive some portion of the claim (Rs 5.47 billion) from NHAI during Q1FY2018, which is expected to bolster the cash flow and liquidity, however, same is yet to be received.
ITNL has an order book of Rs 176 billion as of March 2018 (1.80x FY2018 consolidated revenues) which offers medium-term visibility, The Rs 30 billion NCD programme of ITNL is backed by a DSRA (debt service reserve account) support undertaking from IL&FS Limited (AAA rated) that would cover all scheduled debt obligations that may arise on the rated NCDs.
As on March 31, 2018, ITNL is the largest player in road development segment on BOT basis (13,493 Lane kms) with a pan India presence in 20 states having 33 road projects (26 operational/7 under construction).
About IL&FS Transportation Networks Limited (ITNL) is an established surface transportation infrastructure company and one of the largest private sector Build-Operate-Transfer (BOT) road operators in India. The company is promoted by IL&FS Limited (AAA/A1+ rated by ICRA) which holds a 71.92% equity stake in ITNL. Since inception, ITNL is involved in the development, operations and maintenance of surface transportation infrastructure projects encompassing national and state highways, roads, tunnels, flyovers and bridges with expertise in the development of Build Operate Transfer (BOT) road projects.
ITNL, through its wholly-owned subsidiary in Singapore, namely ITNL International Pte Ltd (IIPL) holds 100% equity stake in Elsamex S.A, a Spanish O&M operator which provides maintenance services for infrastructure facilities largely in the roads sector in Spain and the rest of Europe and 49% stake (51% being held by Chongqing Expressway Group Company Limited) in Chongqing YuHe Expressway Company Limited (CYECL), a toll -based road project in south-west China.
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