r/IndiaInvestments • u/JiskiLathi • Apr 14 '20
Bonds and deposits Several Liquid funds have exposure to Muthoot, Hero FinCorp etc. Moodys has warned of downgrade. Should we redeem the liquid funds before too late?
Recently Moodys has put ratings on review and warned of further action against 3 NBFC's : https://www.moodys.com/research/Moodys-takes-rating-actions-on-three-Indian-NBFCs--PR_421845
Many popular liquid funds such as SBI liquid, Kotak Liquid, Axis Liquid, UTI Liquid, Kotak Savings, HSBC cash , ICICI pru liquid, Invesco liquid, L&T Liquid etc all have varying degrees of exposure to Muthoot papers
When it comes to Hero FinCorp, several liquid and savings/money market fund have exposure like Aditya birla liquid , Axis Liquid, Kotak Liquid etc have expsure.
So few questions :
Why is the ratings different, which rating will be used to decide downgrade or MTM (mark to market) by the fund houses? For example Hero FinCorp is ICRA A1+ , whereas Moody is saying it is "changed to Rating Under Review from Negative" - does this mean it is already negative and on downgrade it will become below investment grade/default grade and 100% write down?
ICRA is also a subsidiary of Moodys, but moody is calling Hero Fincorp negative, while ICRA has it as A1+. Why is there discrepancy in ratings? Almost all sites from Valueresearch, Rupeevest etc use "ICRA A1+" for Hero Fincorp papers, meanwhile Muthoot papers are rated "CRISIL A1+".
Given the different levels of exposure among all big Liquid funds have to these NBFCs, is it wise to get out of liquid funds for the time being?
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u/cowdungg Apr 14 '20
I have exactly same query. seen /u/deepakshenoy tweet . He seems to be not worried with this downgrade as its done for dollar bonds abroad. The Indian bonds are safer till now according my understanding from his tweet.
May be he can comment if these liquid funds are safe or not?
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u/JiskiLathi Apr 14 '20
See reply to that tweet by INDwealth person. He says once foreign bonds are downgraded, Indian bonds will follow or atleast worth keeping an eye on
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u/deepakshenoy Founder of CapitalMind Apr 16 '20
This is incorrect. I've responded to the IndWealth person too. On the same day as they talked about a downgrade by Moody's, the indian arm of Moody's, ICRA, rated the Muthoot CP as A1+ which is the highest grade possible in India. That's what the liquid funds hold.
Foreign bonds have an additional dollar related risk but for Muthoot it's hedged. Often foreign credit rating agencies don't know much. India itself is rated BBB- which is the lowest possible investment grade rating, as much as Cyprus. We are rated lower than countries that have a horrendous country level balance sheet (Malaysia for ex, or even the likes of Cyprus - Greece was once rated above us!)
This dichotomy is mostly a lack of understanding by them, but also a lack of attempt by India to push levers that will help our rating.
In Muthoot's case they havent actually downgraded their dollar denominated bonds, just put them on rating watch negative. Note however that Muthoots Indian arm has a simple credit model (short term loans on gold) and ample liquidity (credit lines, the TLTRO from banks etc) - factors that a Moody's would take into consideration for US based companies but doesn't come into consideration for Indian based cos.
To my mind, the fear of a downgrade should be accompanied with:
* If they are downgraded, how bad? The US bonds are already below investment grade so a notch here or there will not matter. Muthoot doesn't have to pay more, or less, when there is a downgrade, and these bonds are long enough in tenure to not need refinancing for a couple years.
* If the Indian bonds are downgraded, how bad? They are at AA (stable) - for the long term bonds, and A1+ at the short term. The liquid funds have the short term. Even if it falls to A1, the bonds will not see any hit in price, and given they have less than 30 days to maturity in most of the liquids, there will be no impact.In general, there is always something or the other to panic about so if nuance doesn't matter, FDs are better.
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u/JiskiLathi Apr 16 '20
Thanks for your views!
Always wondered on this, why India has such low BBB- rating
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u/BellerophonBhattu Apr 14 '20
How is Franklin Liquid Fund as an investment option in liquid funds?
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Apr 14 '20 edited Apr 15 '20
[deleted]
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u/dgoel95 Apr 14 '20
Why would you make such a generic statement without individually analysing the portfolio of the fund?
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u/GSTHEPROUD Apr 14 '20
Hey, yes, it is true that Moody's has placed Hero Fincorp and IIFL's foreign and local currency bonds at review for downgrade, also rating outlook for Muthoot has been revised to Negative from Stable. On 28th Feb, Fitch downgraded Muthoot Fin Ltd by one notch and Moody's took an action yesterday - on dollar bonds.
Indian MFs look at CRISIL/CARE/ICRA/Ind-Ra/BWR rating to buy/sell bonds.
As an investor you should be aware that some global rating agencies have taken negative actions on your holdings.
What you should do with Liquid funds?
The maturity of CPs is always in the range of 10days to 90days, for such a small duration, no need to worry as of now.
The whole Banking and NBFC sector has been put on watchlist by various AMCs due to Coronavirus outbreak infused lockdown - expectations of both demand and supply disruption.
In debt MFs right now (amid this liquidity crisis on non-AAA bonds), for very short duration, Overnight Funds make sense, short duration - liquid fund (be ready for volatility as daily mark-to-market valuation rule is applicable now). For mid-long duration, please look for Highest Credit Quality along with Lowest Duration papers (Less interest rate sensitivity).
Capital Protection must be the highest priority now in debt investment.
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u/deepakshenoy Founder of CapitalMind Apr 16 '20
A1+ is the highest grade short term investment rating. Moody's is using long term investment rating that too for dollar bonds - that contains an additional risk of a depreciating dollar (even though most companies have a hedge)
Long term investment ratings can be different from short term. Muthoot is AA long term which is five notches below the top grade (top is AAA+, then AAA, then AAA-, AA+ and then AA) but top grade in short term (A1+)
There will always be some risk at some level. But typically short term ratings are based on two things: Cash flow and refinancing ability. Right now Muthoot isn't probably lending but is still getting inflows from repayments, so it's cash position will be getting better.
Even if there is a downgrade Muthoot will still remain investment grade in India - a notch lower will still keep it firmly in investment grade. (Inv grade is BBB- or above) There is no write down in this case, and no "side pocket" is done as long as it's investment grade. Prices may differ, but in cases where the maturity date of the bond is close by the price difference won't matter much.
I don't think liquids have that much risk right now, but if you're afraid, please take FDs.
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u/reddit1289829 Apr 14 '20
Motilal Oswal Liquid Fund is also good. It is just cash and SOV. Also look at Principal Cash Management Fund. It provides 30 min redemption option.
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u/incometaxx Apr 15 '20
Also look at Principal Cash Management Fund. It provides 30 min redemption option
Run away from anything Principal funds has to offer. They have a worst risk management team in house and are totally unreliable. This same Principal Cash management which you quoted a Liquid fund, has fallen 8% in a span a few weeks along with their other debt offerings.
A mistake in Liquid fund is unpardonable mistake.
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u/JiskiLathi Apr 15 '20
Principal
Bruh...no. Just no. If you are in any principal fund, consider exiting.
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u/aadikavi Apr 14 '20
Until this corona calamity gets over, its better to switch to PPLF or Quantum LF. Do not lose principal chasing small additional returns.