In This Issue:
- Editor’s Column – Yes Bank Bonds Spreads to Hurt Investors
- Limited Choice of Papers for Funds if Finance Sector Weight is Lowered
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – Yes Bank Bond Spreads to Hurt Investors
Yes Bank has outstanding market debt which is widely held across investor segments, and the debt has come under a cloud. RBI will now have to make sure that Yes Bank issues do not take a turn for the worse, a headache that the central bank does not need at present.
Given that Yes Bank bond spreads trend higher, holders of Yes Bank bonds will price erosion causing angst in the market.
The issue is whether the banks reported financials can be trusted. NPA mis reporting is serious as is back door pledging of shares by the promoter. SEBI will have to take a serious note of this.
Yes Bank debt will turn completely illiquid and spreads will rise sharply until the issues are sorted out.
Credit Rating agency Moody’s Investors Services downgraded the ratings of Yes Bank citing corporate governance issues and the impact of leadership change on the bank’s growth plan. Moody’s downgraded Yes Bank foreign and local currency bank deposit rating to Ba1 from Baa3. Moody’s also changed the outlook to negative from stable.
Reasons for the downgrade- Rating factor considers the resignation of members of the bank board and RBI decision to restrict the term of Rana Kapoor (Yes Bank Founder). This has raised concerns over corporate governance. Although Yes Bank reported fundamentals to remain stable, the developments surrounding the transition in leadership as well as the governance issues are credit negative.
There had been a divergence in Yes Bank reported asset quality compared with the RBI assessment of asset quality in the two fiscal years ended March 2017 and 2016.
Rating Agency ICRA has also downgraded Yes Bank credit rating to ICRA AA from ICRA AA+, rating downgrade considers the series of resignations from the board of directors which raises concerns on corporate governance at the bank. These developments will adversely impact the Yes Bank ability to raise capital.
After the Moodys downgrade Yes Bank dollar bonds prices fell to an all-time low. ( Yes Bank dollar bonds have lost about 5.2% since they were sold in January, making them the second biggest loser among fixed-rate dollar bonds issued in 2018 by Indian corporate.) Source- Bloomberg Report
Morgan Credit & Yes Capital Monetize Yes Bank Shares Without Pledging
Morgan Credit currently holds around 3.04% stake in Yes bank and to raise money, Morgan issued zero-coupon, nonconvertible debentures maturing in 2021, and it promised that the borrowed amount plus accrued interest will always be less than half of the market value of its holdings in Yes bank.
Morgan Credit debt cap (i.e. ratio of total borrowings of Morgan Credit to market value of Yes Bank shares held by Morgan Credit plus market value of unencumbered Yes Bank shares held by Morgan Credit promoters and its relatives) shall not exceed 0.5 x at all times. As Yes Bank shares have fallen by more than 50%, at CMP Morgan Credit debt cap ratio now exceeds 1.0 x
Yes Capital cover ratio (i.e. entire borrowing as well as all contingent exposures including but not limited to corporate guarantee, contingent liability, undertaking etc. of Yes Capital shall be taken into account and also the cover i.e. ratio of market value of Yes Bank shares held by Yes Capital to total borrowings shall be at least 3.3x at all times). As Yes Bank shares have fallen by more than 50%, at CMP Yes capital cover ratio has now fallen below 2.0 x.
The Kapoor family has to fulfill its promise by bringing in more funds to make up the shortfall.
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.
Limited Choice of Papers for Funds if Finance Sector Weight is Lowered
SEBI is considering lowering the financial sector weights for Mutual Funds post the IL&FS default. However, the financial sector forms the bulk of investments of funds, especially credit risk funds and lowering the weights will have an impact on yields and returns. Table below shows the comparison of top 10 credit risk funds in terms of AUM and all funds have highest weight in financial sector followed by infrastructure including power. Funds will struggle to deploy cash as other sectors absorption capacity is low.
Expense ratios too are high and if returns fall, such high expense ratios will deter investors and the whole credit risk category will see a fall in AUM.
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