ICRA and other rating agencies like CRISIL and Moody’s recently downgraded the IDBI Bank’s debt obligations.
What does it mean?
A credit rating reflects the rating agency’s opinion on the likelihood of timely payment of interest and principal on the debt obligation.
A credit downgrade by a rating agency means that its confidence level in the company’s debt repayment ability has decreased.
Weak capital position and continued stress on profitability and asset quality have been cited as concerns.
Why is it important?
Downgrades can offer insights into the underlying financial performance of the company.
e.g The downgrade of IDBI Bank takes into account the bank’s weak operating and financial performance during FY17.
Downgrades and their reasons matter to various stakeholders including bond holders, stock investors and bank depositors. They serve as red flags and could be a call to action.
For bond investors, the company’s reduced capacity to meet its payment obligation is a concern.
Retail investors have exposure to such bonds mostly through debt funds that invest in these bonds.
Net asset value (NAV) is value per share of a mutual fund on a specific date or time.
The NAV of debt funds moves with underlying bond prices. The bond prices reflect the ability of the company to service its interest and principal.
If a company actually defaults on its interest or principal repayment, then the debt fund’s portfolio, to that extent, is written off. This will impact the NAV of the debt fund.
Downgrades also have implications for investors in the stock of company. Over the past month, the stock price of IDBI Bank has fell 21%.
