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Fixed Income

The Owner of Deccan Chargers Defaults

(This is a story via Dheeraj Singh) Deccan Chronicle Holdings Ltd. (DCHL), the owner of the Deccan Chargers IPL team (and the newspaper business, the Odyssey bookshops, Netlink ISP and so on) has defaulted on it’s debt. Says, Care, which has downgraded the rating on DCHL’s short term debt to "D" (default):

The revision in rating is due to default by the company on short term Non Convertible Debentures (NCD). As per the company’s submission, it had outstanding cash balance/ FD amounted to Rs.372 crore as on December 31, 2011 and gross cash accruals for the last quarter (1st January to 31st March 2012) of FY12 amounted to Rs.20 crore. Despite aforementioned liquidity, the company has defaulted on its debt obligations. The company has not offered any explanation regarding the same.
The ratings have been placed on ‘credit watch’ as CARE is in the process of seeking additional information/clarification from the company. CARE will take a view on the ratings once clarity is available on the same.

This is strange, as in, the company seems to have the money but won’t pay. Of course, books are very different from the real story. Either ways, this is likely to be classified as a wilful default.

DCHL had some debt coming due on 29th June, which might be the bonds in default (these were 5 year 8% bonds, interest paid monthly). There is some commercial paper coming due on the 10th and 15th of July – I checked the recent portfolios of some of the short term debt funds I own and they don’t seem to have them, but it’s also likely that a mutual fund sponsor or AMC will take the hit to protect investors. (No one wants to see a default in what is supposed to be a safe portfolio).

This might impact other debt that DCHL has issued; the traded prices could fall if investors attempt to exit in panic.

If this is the beginning of the default situation, then be aware that your investment in mutual funds could be hit if they hold a defaulter’s debt in their portfolio. We’ll attempt to uncover which mutual funds hold the suspect debt.

Finally, remember that this could be fixed if DCHL just repays the bonds, since they supposedly have the cash. A late repayment will be considerably suspect (why not do it in time?) but it will help a fund that owns the distressed debt (they’ll be "made whole").

DCHL is also a traded company. It’s stock isn’t overly bothered, though it’s fallen a lot:

image

Wonder what this starts off, as a cycle.

  • Mehul says:

    Hi Deepak / Dheeraj,
    Bond market now has quiet a decent number of NCDs / Bond issued by NBFCs / Financial companies offering lucrative coupon. YTM is even better for several of them beating long term equity market returns. I think market is aware of default risk on these NCDs and hence they are trading in discount to their face value -even after factoring for accrued dividend. I have been approached by brokers to buy these NCDs (issued by IIFL, Sriram, Mudhoot and the likes) pitch being that they are available at discount. Common sense should prompt for explanation why NCDs with good ratings (lets say from Tata Motors or Tata Finance) are trading at premium in the same economic environment while others are available at discount (I guess some started trading at discount in a very short while after issue).
    My limited understanding says its due to the inherent risk of default by these companies demonstrated in their discounted price. Would be glad to know if there are other reasons from you both please. In fact, there are hardly any public data available for retail investors to evaluate these NCDs except for their credit ratings.

    • Shiva says:

      You really think that Shriram Group can default? Or even Muthoot/Manappuram for that matter? Please go thru their financials to ascertain the same

    • dheeraj says:

      Mehul,
      Don’t go just by the premium / discount thing. Two different bonds might trade at similar yield levels – and still one may be trading at a premium and the other at a discount.
      You’ll need to get an understanding of “bond mathematics” to get a hang of this. It’s not as simple and straight forward.
      That said, perception of default risk is just one (though an important one) input while determining a market price. There are several other factors too that the market takes into account while pricing bonds.
      Credit Ratings – the less said the better. DCHL was rated A1+ (the highest rating for short term instuments) right until it’s default – when it was downgraded straight to D. The rating agencies get away very lightly – after all they don’t have any significant money at stake. My advice (gained from years of professional fund management) would be – Don’t believe them, do your own due diligence.

  • Anon says:

    Dheeraj has said it well.
    Also this company historically has made heavy investments / loans if you check their financials.
    Also they have high debts and gave heavy dividends till last year.
    (Other scary companies I thought were Shree Ganesh Jewellery and Tribhovandas).
    Their are complaints about the promoter giving high designations to his family members and paying them fat salaries. They could also have fictitious employees like Satyam !
    Their franchise is also not so sexy having the smaller stadium at Chennai I am told. Not sure about that detail though.