Saturday, May 29, 2010

CAREless ratings, selling and screwing the investor

Shriram Transport came out with an issue of loan, which sold like hot cakes, due to a high coupon. Every bank sold it aggressively, hiding facts.

I got a marketing mailer from my bank broker for subscribing to a NCD of Shriram Transport Finance. Going through the mailer, a few things were very disturbing. It is more to do with how things are marketed and a point of view on a rating agency.

o The secured portion of NCD issue is rated “AA+” and unsecured portion of NCD is rated “AA” by CARE. STFC will create appropriate security in favour of the Debenture Trustee for the secured NCD holders on the assets to ensure 100% asset cover for the secured NCDs. “
The above is an extract from a bank that markets a NCD of Shriram Transport Finance. I do not have the time nor patience to read through a 511 page offer document. Also, I am not sure I will understand it. Going thru the offer document I find that the issue has two rating agencies. Below is an extract:
The Secured NCDs proposed to be issued under this Issue have been rated ‘CARE AA+’ by CARE for an amount of upto Rs. 50,000 lacs and ‘AA/Stable’ by CRISIL for an amount of upto Rs. 50,000 Lacs vide their letters dated April 19, 2010 and April 27, 2010, respectively and the Unsecured NCDs proposed to be issued under this Issue have been rated ‘CARE AA’ by CARE for an amount of upto Rs. 50,000 Lacs and ‘AA/Stable’ by CRISIL for an amount of upto Rs. 50,000 Lacs vide their letters dated April 19, 2010 and April 27, 2010, respectively.

The bank that is marketing the issue is strangely (and unethically) silent on the second rating, which is identical for both the secured and unsecured one. (See below for my views on this)
Below is an extract from the company website:
Our products (pre-owned and new) offerings to Small truck Owners (STOs) and First time user (FTUs) includes:

Commercial Vehicle Finance
Passenger Commercial Vehicle Finance
Multi Utility Vehicle Finance
Three wheeler Finance
Tractor Finance
Construction Equipment Finance
Tyre Loan
Engine Replacement Loan
Working Capital Loan
Co-Branded Credit Card
Freight bill discounting

The ‘security’ is going to be from the above asset class, presumably. And the security is ‘to be created’ out of the moneys that will be lent in future from the money raised! And security cover will be 100 percent! Wonder whether 100 percent is based on loan amount or on asset value? Nothing is clear, unless one bothers to get the offer document or the rating rationale.
Given the nature of security, I am stunned by a rating differential in the ‘secured’ vis a vis the ‘unsecured’ portion! Wonder what the rating agency saw? The security is absolutely useless in ensuring any timeliness of payment which is what the rating agency opinion is supposed to convey. It is apparent that a higher rating has been engineered to make the asset eligible to be bought by mutual funds, trusts, provident funds etc.,
In any case, whilst lending against a truck or some such vehicle, the lender will of course have a charge on the vehicle. If he does not, he should not be in business. So, if the cover is just going to be 100 percent, i.e. the best case is that every rupee of the NCD used for lending is backed by a rupee of loan (which should have more than a rupee worth of asset backing it). Where is the question of ‘unsecured’ money, unless it is not going to be used for lending?
And, in a credit rating, ‘security’ has no impact on a credit rating unless there is a financial escrow linked to it. Here, there does not seem to be any. Under these circumstances, how can there be two ratings for the same business? I am ignorant about this, but maybe CARE has some logic behind the split ratings.
Rating agencies ought to best understand that in India, ‘secured’ is a meaningless term. The corporate default graveyard is full of such corpses. “Secured” is a myth foisted on innocent people. Yes, it will have a meaning if a specific loan is secured by an asset that is exclusive to that loan and is readily saleable (like a commercial building or freehold land and NOT plant and machinery).
Investors can take advantage here. To me, secured or unsecured, makes no difference. If at all I have to invest in this paper, I will choose the unsecured one as it would give a higher return. If there is going to be a default, both will default.

No comments: