On August 5, rating agency ICRA downgraded its ratings given to non-convertible debentures (NCDs) of Tata Motors Limited (TML) to AA- (Negative) from AA (Negative). ICRA said that the revision in the rating reflects the continued deterioration in the financial profile of Jaguar Land Rover PLC (JLR), TML’s wholly-owned subsidiary, amid headwinds in China and Europe (including the UK) markets. It emphasised that the negative outlook reflects ICRA’s expectations of a further deterioration in the credit profile of TML, primarily due to weakening of JLR’s credit metrics amid rising pressures on its sales volumes. TML’s NCD programme of Rs 2,250 crore is rated by ICRA. Do any mutual funds holds the NCDs in question? How will this impact them? RupeeIQ explains.
The NCD programme
ICRA rates Rs 2,250 crore worth Tata Motors NCDs. The outstanding amount is Rs 1,800 crore in these NCDs. An amount of Rs 450 crore NCDs is still to be issued. Between 2010 and 2014, Tata Motors had raised funds through the NCD route. The ICRA-rated NCDs are slated for maturity between March 2020 to September 2024. They carry coupon rate of between 9.02% to 9.95%.
Here is the list of debt funds that have exposure to the aforementioned Tata Motors NCDs. Apart from 1 debt fund, most of the schemes have low exposure to these NCDs.
|Scheme Name||Instrument Name||ISIN||Holding %|
|Canara Rob Corp Bond Fund(G)||Tata Motors Ltd. 9.9% (7-May-20)||INE155A08043||8.6659|
|IDFC Credit Risk Fund(G)||Tata Motors Ltd. 9.7% (18-Jun-20)||INE155A08068||1.5276|
|IDFC Credit Risk Fund(G)||Tata Motors Ltd. 9.9% (7-May-20)||INE155A08043||0.3826|
|IIFL Dynamic Bond Fund(G)||Tata Motors Ltd. 9.9% (7-May-20)||INE155A08043||0.3069|
|Franklin India Credit Risk Fund(G)||Tata Motors Ltd. 9.7% (18-Jun-20)||INE155A08068||0.2326|
|SBI Credit Risk Fund(G)||Tata Motors Ltd. SR-E-26 B 09.81% (20-Aug-24)||INE155A08191||0.1917|
|Franklin India Ultra Short Bond Fund-Super Inst(G)||Tata Motors Ltd. 9.7% (18-Jun-20)||INE155A08068||0.1750|
|Aditya Birla SL Savings Fund(DAP)||Tata Motors Ltd. 9.7% (18-Jun-20)||INE155A08068||0.0989|
|Aditya Birla SL Savings Fund(G)||Tata Motors Ltd. 9.7% (18-Jun-20)||INE155A08068||0.0989|
Do note that the above data shows you most of the funds with exposure to Tata Motors NCDs are credit risk funds.
Why Tata Motors matters
Tata Motors is an automobile company, and it draws a huge portion of standalone revenues from commercial vehicles segment. JLR is more into personal vehicles. Unfortunately, both the segments of the business are not doing well. With the Indian economy going through a downturn, commercial vehicles may find it tough to recover. The stock market already reflects a large part of these concerns. The Tata Motors stock has halved in the last one year.
The company has cut pick-up production at Pantnagar plant by 17%. Tata Motors shut shop at twin towns for three days. Successive sales reports signal continuous decline. The only bright spot in all this is that Tata Motors being part of the Tata Group enjoys comfortable capital structure and strong liquidity position.
How rating downgrades affect your debt fund
When a rating changes happen, it affects the market value of the debt instrument. When a debt instrument that a fund holds is downgraded, the fund has to mark down its value (or write-off) to show the revised value.
The amount of markdown depends on the extent of the downgrade. The fund’s NAV reflects this markdown and can report a sudden 1-day fall. The sharpness of the fall depends on the fund’s exposure to the downgraded paper. Where exposure is higher, the fall is higher.
Do note that a rating downgrade is not a default. If the company services its debt, the fund holding that debt hasn’t lost anything in real terms.
For debt MF investors, the Tata Motors NCD exposure angle is most relevant for Canara Robeco Corporate Bond Fund. The NCD maturing in 2020 is the top holding for the Rs 175-crore Canara Robeco Corporate Bond Fund. Over 8.6% of the fund’s money is in this fund. Hence, investors must monitor the situation closely even as there is no quick resolution to Tata Motors’ situation.
Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.