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ICICI Again: Loans downgraded, CDS spikes up

More news on ICICI. From ET:

Ratings agency ICRA has downgraded ratings assigned to some of the securitised car loan products of ICICI Bank. The ratings have been downgraded by 1-2 notches on the back of higher delinquencies.

The underlying receivables in these transactions are a mix of new car and used car loans. Till a couple of months ago, ICICI Bank was the largest car loan provider in the market. Over the past couple of months, disbursements of these loans have gone down compared with last year. Also on two-wheelers, the bank has stopped financing through the dealer network, where most of the disbursements happened.

ICRA said, “The delinquency level in these pools is more than expected, leading to significant utilisation of credit enhancement.

Credit enhancement is what ICICI provides to the ABS pool when the liquidity (cash flow) from the loans reduces, basically supporting the payments to other investors in the pool. The fact that they securitised is a good thing – now the risk is not ICICIs anymore; it was so only to the level of equity ICICI held (plus the credit enhancement). But it begs the question: If ICICI was the largest loan originator, it surely did not securitise all its car loans – the apparent increase in delinquency in an ABS pool would surely reflect in its owned portfolio as well.

And further, Credit Default Swaps (CDS) on ICICI’s debt have risen:

Bond spreads for Indian banks such as ICICI (ICBK.BO: Quote, Profile, Research) widened on Friday on fears a costly wage increase for government employees could threaten the country’s fiscal deficit, and hence, its sovereign rating.

CICI Bank’s (ICBK.BO: Quote, Profile, Research) five-year credit default swaps (CDS) <icic5YUSAC=GFI> widened by 5 basis points to 325/350 …

Credit Default Swaps are insurance – if ICICI defaults, the CDS seller will pay out the remaining interest and principal. The buyer of the CDS essentially buys protection. When the cost of CDS goes up, the perception is that default risk is higher.

This is scary. This time it’s not ICICI’s fundamentals, but the entire country’s rating (which ICICI is above, by the way) which impacts the CDS price. And as a country we are doing as much damage as we can. Writing off farmer loans, dramatically increasing wages, not quite fighting inflation, and having a ruling party known to put politics over economics with elections less than a year away. Oh, what fun.

(Yes, I know, too much ICICI, but the news is all over the place)

Disclosure: No current positions, am short in SOS (Short Only Strategy).