Manappuram Finance, a once highflying company in the gold loan lending business, saw its fortunes fall in equity markets as well as bond markets. The company’s stock price has collapsed by 80 percent since July 2011 after a 12-fold rise during 2008-11. Prices of its non-convertible debentures (NCDs) declined as concerns over its credit rating arose in the bond market. When its stock price was rising, Manappuram Finance had also frequently issued NCDs.
Those who invested in Manappuram when the stock was at higher levels have taken a hit. Holders of its debt have witnessed an erosion of capital.
However, if the company pays back its NCD holders on maturity, the debt investors will not suffer losses. The price decline of Manappuram’s NCDs highlights the credit risk on investments in high yield securities.
NCD ratings
Manappuram’s NCDs are rated A+ negative by CRISIL, A+ Negative by ICRA and A+ by CARE. A+ ratings signify that the company’s capacity to repay debt is good but the negative sign denotes that the company’s financials could deteriorate further. Manappuram’s ratings were downgraded by Care (from AA- to A+) in February 2012 and by CRISIL (from stable to negative) in August 2012. ICRA too lowered its ratings in April 2013.
Manappuram has NCD rating outstanding of Rs 5,000 crore from the three rating agencies of CRISIL/ ICRA and CARE and has 36 NCD issuances outstanding. Trading in Manappuram NCDs is few and far between with them changing hands for just three days in April 2013.
NCD prices
The last NCD traded on Manappuram was the 12.20 percent 8 September 2013 maturity NCD. The trade was on the 25 April 2013 at a price of Rs 98.57 implying a money market yield of 15.97 percent. The credit spread of Manappuram’s NCDs in relation to similar maturity government bonds/ treasury bills is a whopping 820 bps. The face value of the NCD is Rs 100 and if a holder had purchased the NCD at Rs 100 face value at issue price, he will be selling at a loss of Rs 1.43 per NCD if he sells at the current market price of Rs 98.57. Any institution, whether it is a mutual fund or an insurance company, holding Manappuram NCDs will be valuing the NCD at Rs 98.57 and this fall in valuations will be reflected in the net asset value (NAV) of their schemes holding these NCDs.
Manappuram has issued NCDs that mature in 2015 and 2016. The 12.25 percent NCDs issued on 31 March 2011 will mature on 31 March 2016. No trades have been recorded in this NCD but on a fair valuation basis, given the credit spreads of the 8 September 2013 NCD at 820 bps, this NCD should be valued at a yield of 16 percent. The price of this NCD at 16 percent yield will be Rs 91.50. Holders of this NCD will be losing Rs 8.5 per NCD if they try and sell the debentures at the current market yields. However, the market may give lower credit spreads to longer maturity debentures of Manappuram due to expectation that the company will come out of its current problems over a period of time. Unless there are real trades happening in the longer dated NCDs of Manappuram, it will be difficult to prove this hypothesis.
Credit risk
The reason for Manappuram falling out of favour with the market is the company’s exponential growth of 112% CAGR in the four year period until 2011, when gold prices kept hitting record highs. The recent fall in gold prices 15 percent from the record highs has hit the company badly and it has announced a Rs 250 crore write-off as loan value spiralled lower than asset value. The company is now sharply exposed to gold price movements and gold prices are looking weak due to various global and domestic factors.
The sharp rise in yields on Manappuram NCDs brings to fore the credit risk in high yield securities. Subscribers to high yield NCDs should be aware of credit risks and should also evaluate alternatives. A moot point is that returns on risk-free government bonds have been around 12% to 14% over the last one year due to fall in bond yields. Why should anyone take credit risk when risk-free returns are higher?
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