In This Issue:
- Editor’s Column – Lack of Market Intelligence is Where Rating Agencies Messed Up on IL&FS
- SBI Credit Risk Fund – Portfolio Analysis
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – Lack of Market Intelligence is Where Rating Agencies Messed Up on IL&FS
AAA to default in just a matter of months, can a company mess up in a few months or has the mess accumulated over ages? In the case of IL&FS, the mess has definitely accumulated over ages as per the latest revelations of the probe by the government. The question is why did the rating agencies not see through the mess and react only after the mess happened?
IL&FS was run like a club, with no accountability of the management to the mixed bag of institutional owners that included LIC, Orix of Japan, SBI and a few other banks. The whole set up was a recipe for disaster especially since the entity was not even subject to high regulatory scrutiny. The company increased leverage substantially, which the rating agencies had noted and the company had also invested in projects with highly uncertain cash flows, which the rating agencies had also highlighted. Yet, the rating was AAA stable before the sudden sharp downgrades.
The experienced professionals in the market who had dealt with IL&FS and recognized their culture would have flagged off their concerns if there was any gathering of market intelligence by the rating agencies. The agencies should make it a point to obtain information from sources other than the company, especially as there is a conflict of interest with the company paying the agency for the rating.
The company will always provide the information that will enable better ratings. Agencies are securing more and more information to their credit but the source of information should be varied. Questions should be asked if credit spreads are rising even without rating changes and spreads are widening against similar rated borrowers. The equity market is also a good source of information as equity pricing can be more efficient in judging a company’s expected future performance. Auditors too are vital sources of information and so are lenders, transactors and other advisors dealing with the company.
The forensic audit should also be used by rating agencies if there are concerns arising from various other sources.
The IL&FS mess has now cast a doubt on all other companies rated AAA.
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SBI Credit Risk Fund – Portfolio Analysis
SBI credit risk fund portfolio is diversified through 15 sectors, 84.06% of fund holdings are diversified across 7 sectors. The finance sector has 32.7% weight in the total portfolio (Financial sector includes Banks, Microfinance, HFCs). Apart from the financial sector, power has the second highest weight followed by construction, cement, and services sectors. Power has 17.47% weight, Construction has 9.76% and Cement has 7.41% weight in the portfolio.
Fund holds 20 papers from the financial sector, the majority of papers are from the NBFC companies or private banks.
Construction sector includes building construction and real estate companies, the outlook for the construction sector is improving as the government has taken several initiatives to encourage the development in this sector. Implementation of RERA & GST will make this sector more transparent and streamlined, which will improve the consumer & investor sentiment. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. SEBI has given its approval for the Real Estate Investment Trust (REIT) platform, which will help in allowing all kinds of investors to invest in the Indian real estate market.
In the power sector, the fund holds transmission companies, renewable energy, and generation companies NCDs. The power sector is in stressed position but transmission sector is doing better when compared with generation and distribution. Fund majority of holding is in the transmission sector or renewable energy sector. Click here to Read Outlook on Transmission & Renewable Sector
SBI credit risk fund portfolio has 52.98% of bonds with higher credit ratings (AA and above) while 47.02% of bonds are lower rated.
SBI credit risk fund holds Au Small Finance & Cholamandalam Investment Bonds whose credit rating was upgraded recently, and Syndicate Bank whose credit rating was downgraded recently.
Expese Ratio- 0.82% (direct plan), 1.75% (regular plan).
Yield to Maturity- 9.44%
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