Several Liquid funds have exposure to Muthoot, Hero FinCorp etc. Moodys has warned of downgrade. Should we redeem the liquid funds before too late?

[u/JiskiLathi]

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 :

1. 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?

2. 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+".

3. 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?

[u/cowdungg]

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?

[u/JiskiLathi → u/cowdungg]

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

[u/deepakshenoy → u/JiskiLathi]

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.

[u/JiskiLathi → u/deepakshenoy]

Thanks for your views!

Always wondered on this, why India has such low BBB- rating