In This Issue:
- Editor’s Column – NBFC CP & Bond Spreads Indicate Risk Aversion is still High
- DSP 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 – NBFC CP & Bond Spreads Indicate Risk Aversion is still High
NBFC CP and Bond spreads have risen sharply since the IL&FS default and markets are still risk averse on the sector. Large NBFCs and HFCs such as India Bulls and DHFL have highlighted their strong liquidity profile but market nervousness persists. Default by Supertech, a real estate company, that has borrowed from NBFCs saw stock prices fall sharply on 17th October, further highlighting the extreme nervousness in the market.
In September 2018, the IL&FS default and market panic on DHFL caused a deep stress on credit markets. Yields on NBFC CPs and bonds rose sharply across the board as mutual funds have turned risk averse and sold of most NBFC papers. The rise in CP and bond yields of NBFC issuers has lead to rise in credit spreads.
Credit risk aversion post IL&FS default has still not gone out of credit yields despite the fact that NHB and SBI have pledged support for Rs 750 billion of liquidity for NBFCs. Liquidity, which is a primary driver of credit yields, turned negative on RBI fx sales, as the INR fell to record lows of below Rs 74 to the USD. RBI bought Rs 120 billion of bonds through OMOs last week to ease liquidity pressures. Liquidity will stay tight as the festive season draws in demand for funds and CP and CD yields expected to stay high.RBI will be conducting more OMO bond purchase auctions to infuse liquidity into the system.
Certificate of Deposits (CD) 3 months and 12 months maturity yields are at levels of 7.23% and 8.50% respectively, as of October 2018. CD 3 months and 12 months maturity spreads against T-bills are at 35 bps and 99 bps respectively. Since Mid September 2018, spreads have risen 6 bps and 36 bps respectively.
NBFC Commercial Papers (CP) 3 months, 6 months and 12 months maturity yields are at levels of 8.2%, 8.65% and 9.18% respectively. NBFC CP 3 months, 6 months and 12 months maturity spreads against T-bills are at 132 bps, 145 bps and 167 bps respectively. Since Mid September 2018, spreads have risen 37 bps ,17 bps and 47 bps respectively.
Three-year AA+/AA NBFC bonds were trading at levels of 9.50% with spreads at 160 bps,52 bps higher against mid September 2018 levels.
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DSP Credit Risk Fund – Portfolio Analysis
DSP credit risk fund portfolio is diversified through 18 sectors, 89.11% of fund holdings are diversified across 10 sectors. The finance sector has 36.24% weight in the total portfolio (Financial sector includes Banks, Microfinance, HFCs). Apart from the financial sector, power has the second highest weight followed by metal and Infra sectors. Power has 18.22% weight, Metal has 6.74% and Infra has 5.58% weight in the portfolio.
Fund holds 33 papers from the financial sector, the majority of papers are from the NBFC companies or private banks.
In the metal sector, the fund holds Vedanta and Tata Steel NCDs. The outlook for the metal sector remains bleak as global growth can derail due to trade spat between the U.S. and China, which can affect commodity prices. As the trade war between the two countries becomes severe, China can experience an economic slowdown, because the U.S. is one of the largest markets for Chinese products, and the newly implemented tariffs would lead to lower sales and employment in China. According to IMF, China growth is expected to drop to 6.2% from 6.6% this year.
However Domestic steel demand continues to grow at a good pace, steel demand rose by 6.8% in the September quarter over a year ago, Outlook for Tata steel remains healthy as the acquisition of Bhushan Steel Ltd will boost output. Reports suggest domestic steel prices are trading at a discount of 6-7% to the landed import price, which leaves room for price hikes in the near future.
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
DSP credit risk fund portfolio has 65.28% of bonds with higher credit ratings (AA and above) while 31.52% of bonds are lower rated.
DSP credit risk fund holds Au Small Finance, Cholamandalam Investment, Fullerton India Credit, Hinduja Leyland Finance Bonds whose credit ratings were upgraded recently, and IL&FS Energy Development, IL&FS Transportation Networks, Jana Small Finance Bank and Aspire Home Finance whose credit ratings were downgraded recently.
Expese Ratio- 1.20% (direct plan), 1.80% (regular plan).
Yield to Maturity- 9.71%
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