Why in news?
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%.
Source: Business Line
