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IDBI rating cut hits corporate debt trade

Trading in the Indian corporate debt market was subdued on Wednesday as investors stayed on the sidelines, waiting to gauge the impact of a ratings downgrade of bonds of the country's largest term lender.

Traders and analysts said that before deciding on taking fresh positions, they would wait to see whether the downgrade was a one-off move or would be followed by more rating revisions.

Late on Tuesday, the Credit Rating Information Services of India Ltd said it had downgraded the ratings of Industrial Development of India bonds and certificates of deposit by one notch to AA+ from AAA, citing poor asset quality and reduced spreads.

The new rating indicates high safety compared to highest safety.

Crisil reaffirmed its highest rating for IDBI's term money bonds and fixed deposits.

Debt dealers said it was too early to precisely assess the impact of the downgrade on the broader debt market, but expected an increase in the spreads on yields of IDBI bonds over other corporate and government debt.

"It is too early to estimate the full impact of the downgrade but there is selling interest in IDBI bonds although there are no bids," said a dealer at a domestic brokerage.

Before the downgrade, bonds of IDBI were traded at spreads of 180-190 basis points over government bonds.

Traders expect spreads to widen to 200-250 basis points over the next few days, mainly on sales by mutual funds holding large positions in IDBI bonds.

Analysts and traders were not overly concerned over the downgrade of the leading term lender, in which the Union government holds a significant stake, saying the market was expecting some such action following poor results.

"The downgrade is IDBI specific and should not affect the market adversely," said Dhananjay Sinha, analyst at JM Morgan Stanley Fixed Income Securities.

The company's profits fell 27 per cent to Rs 6.91 billion in 2000-01 from Rs 9.47 billion a year ago.

"A downgrade of IDBI bonds alone should not send investors running for cover; it is not a last-case scenario," said Kaushik Modak, vice-president and head, Fixed Income Securities Group, Kotak Mahindra Capital Company.

"IDBI bonds already trade at a premium over other bonds. With adequate government support, their yields will become the benchmark for pricing of AA rated paper," he said.

Bonds of the term-lending giant were traded at yields of 50-60 basis points over other similarly rated corporate debt. This spread is now expected to widen to 125-130 basis points following the downgrade.

Market seen cooling off

In the immediate term, the primary market for corporate debt is seen subdued.

"Over the last two months, borrowers have been tapping the market simply to make the best of the extremely competitive rates, but funds raised have not been deployed in the best possible manner," Manoj Swain, deputy manager, ICICI Bank said.

"With yields inching up again, it makes more sense to wait," he said.

Yields on high grade medium-term corporate debt instruments, which had touched a low of 9.25 per cent during a five-week liquidity driven rally which began in June, had already started to inch up last week, tracking a volatile government bond market.

Tight call money market rates, hovering well above the repo rate of 7 per cent, and a slight tightness in money market liquidity following outflows towards bond auctions, put the brakes on the rally last week.

There has also been uncertainty over the interest rate outlook after comments by a senior central bank official last week appeared to rule out the possibility of a widely expected central bank rate cut.

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