In This Issue:
- Editor’s Column – Credit Markets Thawing Slowly
- HDFC 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 – Credit Markets Thawing Slowly
The extreme nervousness is seen going out of credit markets with marginal falls in credit yields at the short end of the curve. Read our Weekly Credit Report for details. NBFCs have been meeting CP and bond redemptions without any issues and have also been able to securitize assets with banks.
RBI board meeting on 19th November has given leeway to banks on their capital requirements, which on the face of it, is credit positive. The leeway allows banks to get extra leverage on lending but it remains to be seen if banks will actually go and lend wholesale, given that credit risk aversion is still high post IL&FS default and also political uncertainty on 2019 general elections.
The Reserve Bank of India’s (RBI) Central Board meeting on 19th November discussed issues such as the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corrective Action (PCA) framework and the Economic Capital Framework (ECF) of RBI.
RBI board has decided to retain the CRAR (Capital to Risk Weighted Assets Ratio) at 9%, but agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, to March 31st, 2020. As per the board advice,RBI can consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 250 million, subject to such conditions as are necessary for ensuring financial stability.
During fiscal 2013, RBI issued the final guidelines on the Basel III capital regulations. The implementation of this framework would commence from April 1st, 2013 in a phased manner through till March 31, 2019.RBI financial stability report 2012 mentions that Indian banks will require an additional capital of Rs.5 trillion to implement with Basel III norms, including Rs 3.25 trillion as non-equity capital and Rs 1.75 trillion in the form of equity capital.
As per a RBI board member, extension of transition period for implementing Capital Conservation Buffer (CCB) can reduce capital requirement infusion for public sector banks by Rs 350 billion for Government Of India upto one yea and flexibility in relaxing this ratio can give potential lending increment upto Rs 3 trillion.
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HDFC Credit Risk Fund Portfolio Analysis
HDFC credit risk fund portfolio is diversified through 19 sectors with power, finance, infra and metals having the highest weight in the portfolio. The power sector has 23.39% weight in the total portfolio. Apart from the power sector, finance has the second highest weight followed by infra and metals sector. Finance has 21.84% weight, Infra has 9.71% weight in the portfolio and Metal has 7.96% weight in the portfolio.
Fund holds 36 papers from the financial sector.
In the power sector, the fund holds transmission companies, renewable energy, and generation companies. 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 renewable energy sector and government-backed power companies. Click here to Read about Outlook for the Renewable Sector
In the infra sector, fund holds road construction companies, infrastructure companies and rail infra companies. The outlook for infra sector is strong as India has a requirement of investments worth Rs 50 trillion in infrastructure by 2022 to have sustainable development in the country. Sectors like power transmission, roads & highways, and power plant will drive the investments in the coming years. However, risk is high as infrastructure companies by nature are highly leveraged and are susceptible to economic downturns.
The outlook for road construction companies is strong as only 24% of the National Highway network in India is four-laned, therefore there is immense scope for improvement. In Union Budget 2018-19, Rs 710 billion was allocated for national highways while Rs 190 billion was allocated to Pradhan Mantri Gram Sadak Yojana (PMGSY) for development of roads in rural and backward areas of the country.
In the metal sector, the fund holds Vedanta, Tata Steel, and Hindalco NCDs. The outlook for the metal sector is mixed, 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 steel remains healthy as 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.
HDFC credit risk fund portfolio has 23.08% of bonds with credit ratings of AAA & Equivalent and 46.61% of bonds with a credit rating of AA & Equivalent, Fund holds 20.79% in A+ & below rated bonds.
HDFC credit risk fund holds Au small finance bank, Cholamandalam investment, Hinduja Leyland, L&T finance, Tata capital finance bonds whose credit ratings were upgraded recently, and Aspire Home Finance, Punjab National Bank and Syndicate bank bonds whose credit rating were downgraded recently.
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