Debt downgrades at a record high

Mutual funds have large exposure to such instruments thereby impacting NAVs

The recent downgrades of debt papers of well-known conglomerates are not isolated instances as the current year has seen a record in terms of the number of such downgrades of debt instruments.

Data from Prime Database shows there have already been 163 instances of such downgrades in the current year till date, which is more than twice compared to last year when 61 instances of downgrades were witnessed.

Some of the well known corporates whose debt papers have been downgraded in 2019 by rating agencies include Yes Bank, Wockhardt, Diligent Media Corp, Eveready Industries, Jet Airways and Peninsula Land apart from the prominent ones like Anil Dhirubhai Ambani Group entities, Essel Group and the most recent instance of Dewan Housing Finance.

To be sure, the data has taken into account all kinds of downgrades and does not limit only to a downgrade to default rating.

Interestingly, the rise in the number of downgrades in 2019 has come with a corresponding fall in instances of upgrades, which was not the norm last year.

Rating upgrade

This year, there have been 87 instances of rating upgrade, lower than last year when over 100 debt securities saw an upgrade. “There has been a large number of downgrades in the recent months,” said R. Sivakumar, head, fixed income, Axis Mutual Fund. “It looks like we are still seeing the fallout of the IL&FS matter and so the market is quite cautious right now,” he added. From an investor perspective, the increasing downgrades are a cause for concern as mutual funds have a large exposure towards such instruments and large instances of downgrades affect portfolio selection and thereafter the net asset value of the scheme.

“Till a few months back the spread between a AA and AAA rated instrument had dipped to 50 basis points, which was quite lower than the historical average. While currently it is around 150 basis points, the challenge is downgrades have increased thereby pushing up the risk curve,” said Mr. Sivakumar.

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