Credit Market Still Exposed To Risks

A fund manager who predicted India’s credit crunch months before it got serious last year said that pockets of risk remain that could reignite investor concern.

While the worst of the country’s liquidity shortage and soaring funding costs appears to have subsided for now, a string of corporate defaults suggests that those woes could come back, according to Suyash Choudhary, head of fixed income at IDFC Asset Management Co.

There is still a chance that two or three such risks can interact with one another and therefore cause something bigger, said Choudhary.

Two of IDFC Assets funds have given the best returns among the top debt funds in India over the past year, according to Value Research data. More bad news out of credit market in recent weeks suggests that investors may not have seen the last of turmoil sparked by IL&FS Group’s debt default last year. Troubled Dewan Housing Finance Corp’s rating was cut to default and that of Eros International Media lowered 10 steps on concern about its ability to repay debt.

Also causing investor concern is news that the auditor of Indian tycoon Anil Ambani’s NBFC and its unit resigned, citing lack of satisfactory responses to its questions.

Nerves have already been rattled by defaults at Jet Airways India and debt concerns at conglomerate Essel Group. Choudhary does not claim credit for foreseeing the IL&FS default, but he said the red flags in the credit market were beginning to show a year or more before it. There was a certain amount of euphoria as seen by a compression of spreads on lower-rated assets, major funds flows into such investments, and a larger inclination towards venturing into illiquid structured transactions, he said.

Things have improved since last year. The country’s sovereign risk premium is much better, especially after a strong election mandate, said Choudhary. There’s also reasonable confidence that regulators will step in to arrest the fallout if any risk event were to happen, he said.

Average yields on top-rated five-year corporate bonds issued by non-banking finance companies have fallen to 8.16 per cent on Friday, after soaring to as high as 9.22 per cent in October.

A key risk, Choudhary sees, is in asset managers investing in lower-rated credit for portfolios, which are ill-equipped to take such calls.

That’s because secondary-market liquidity, price discovery or means of hedging risk have not kept pace with the market expansion, he said.