Debt Market lessons

Training as a CA has many advantages (and a few disadvantages perhaps). One of the advantages is you get skeptical about numbers, and you get to question conclusions/views drawn from numbers. I remember one life insurance company giving me their settled claims to received claims ratio. Smartly it included maturity claims, investment products, pension plans….suddenly I had to sit and clean it.

Similarly once upon a time Crisil had rated Lloyds Finance, Apple Finance and Sundaram Finance – briefly I think Cholamandalam also (not sure) as the AAA companies in the financial service sector apart from Hdfc, Icici, and such other biggies.

To us in the markets this was a joke because Lloyds and Apple would throw money at distributors – per application, contest, etc. At this stage you normally tell people who want to listen – ‘please stay away’. EVEN TODAY they have one product rated so high -but it is not Crisil, and no further comments please.

All this is funny because when you are watching the game – and the scorecard is lying you can only be amused. Then suddenly Apple, Lloyds and a few others got re-rated from AAA to Junk pretty fast – 6 months if I am not wrong, surely less than a year! Tata Finance did not get AAA -but every Amar, Akbar, Anthony and Soli was willing to invest in Tata Finance.

That much for rating agencies. Now banks which do not wish to keep transactions on their books, go to a company have its bonds rated, take it to the market, and then sell it off. The question is ‘Will the Rating stay till I sell the bonds’ – say 90 days? L O L.

A bank should do its own appraisal – there would be more committment.

What should be done with rating agencies? Let them just shut down. R I P. Amen.

see what Morgan Housel has to say about these agencies in the US …somewhat similar thoughts

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2 Responses to “Debt Market lessons”

  1. Sansarchandra on June 25th, 2010 at 4:00 pm

    Dear Subra rating agencies get paid to present data in very sophisticated no matter what it’s worth. If they turn out to be wrong they end up getting more business as they are virtually in a monopoly business. Rather than reading and trying to understand their rating, buying stocks of rating agencies makes better sense. I think you know better and will share it in one of your blog post.

  2. I would tend to agree with above comment and part of this is is due to poor debt market in India, thanks to govt regulations. I would look at bond / secured debentures issue by good corporation like

    1) PSU ( SBI, REC, PFC , PGC) etc. which are trad-able on stock exchange and yield 9%-10% p.a. since they are trad-able you will know abt any problem with debt rating or any major down grade and can exit.

    2) lock the interest rate for 5- 10 yes, you can exit when interest rate is very low and enter Balanced funds.

    between risk are there in all the investment including equity , bank FD, etc. and every incremental return comes with associated risk. For a long term investor , risk reward ratio is tilted toward equity.

    Best is to have a financial planner who can keep track of your investments review quarterly and send you recommendation on any changes looking at overall long term goal, economic condition, govt policies, external environment etc.
    Blindly invest in any 1 debt or equity MF scheme for 10-15 years may not be very prudent.

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