Rating agencies such as CRISIL and ICRA have downgraded credit rating of IDBI AT-1 to the lowest investment grade citing weak position. Simply put, the company may skip coupon payment due to lack of distributable reserves.
IDBI AT-1 is a perpetual bond, which means it has no maturity. Though the PSU bank can pay coupon forever, they have an option to repay principal after a certain period.
A few large fund houses have an exposure to this perpetual bond. According to industry sources, at least four large fund houses - HDFC Mutual Fund, Reliance Mutual Fund, Kotak Mahindra Mutual Fund, and Birla Sun Life Mutual Fund have exposure to IDBI Bank’s AT-1 bonds.
We spoke to a few fund managers to understand how this rating downgrade would affect the debt portfolio of your clients.
Lakshmi Iyer, CIO (Debt) and Head Products at Kotak Mahindra Mutual Fund believes that fund managers should not go with rating agencies; instead, they should do in-house research before taking a call. “When the downgrade happened, the yields moved up by just 20-30 bps. Yesterday, there was news that IDBI is going to raise additional capital. Following the news, yields have stabilized. In my view, investors should not worry about downgrade or upgrade of the bonds as these are going to be a part of the business cycle. We don’t take portfolio action based on ratings movement unless we fundamentally believe that there has been a huge deterioration in the business or overall sentiment,” says Lakshmi Iyer, CIO (Debt) and Head Products at Kotak Mahindra Mutual Fund.
Maneesh Dangi, Co-Chief Investment Officer (Debt) of Birla Sun Life Mutual Fund says, “Two of our credit funds have exposure to IDBI AT-1 bonds. They are medium term bond fund and corporate bond fund. Our exposure to IDBI AT-1 bonds is close to 1%. Of course, the downgrade has resulted in some loss but it has been averaged out because of gains in the portfolio from other debt instruments.”
Dangi shared that his fund house sold IDBI AT-1 bonds this month as there have been high demand for such papers from wealth management companies.
“We hold these bonds in two debt schemes where the exposure is less than 2% each. The impact was already seen in the NAV; however, there has been no major impact as our exposure is quite limited. AT-1 bonds are evaluated from an investment perspective like all other debt instruments depending on the risk return potential and hence in terms of exposure, amount and tenor limits are in place which are the reassessed and realigned at frequent intervals,” says Amit Tripathi, CIO–fixed income investments at Reliance Mutual Fund.
However, some fund managers believe that rating agencies would improve their ratings once IDBI Bank pays coupon to their investors. “We have exposure to these bonds in a number of our hybrid schemes. There has been a very minor impact. The impact was just for one day and the long term returns from the funds are still intact. We typically give preference to bonds that are issued by government-owned banks. We do expect that coupons will be paid out without any problem. After the next coupon is paid, price of bond will improve which will lead to a change in sentiment. In future, we expect the ratings to improve as well,” says a senior fund manager at a large fund house.
Most of the fund managers to whom we spoke to said that they would not reduce their exposure to these bonds. These fund managers say that investors need not worry about the risk of default, as the government backs PSU banks.
Joydeep Sen, an independent bond market analyst and financial advisor says, “As the damage has already been done, there is no reason why investors should redeem their investments from debt funds having exposure to such papers. I think investors should not worry about this as government would intervene to resolve the issue.”
