Risk gauge hints ICICI debt investors not a worried lot

Mumbai: ICICI Bank’s equity investors may be a worried lot, but not the buyers of bonds issued by the private sector lender.

Credit default swap (CDS) contracts, which act as a shield against likely default on outstanding debt securities by an issuer, have fallen in case of ICICI Bank since media reports first surfaced on an alleged conflict of interest involving CEO Chanda Kochhar and loans sanctioned by the lender to Videocon Industries.

The one-year CDS gauge had shot up to 29.1 in the fourth week of March from 18.8 just before the reports surfaced in national media. An overseas investor then paid 29.1 basis points or cents to buy an insurance against every $100 investment in ICICI dollar-denominated bonds. If the issuer defaults, the investor’s loss would be covered.

The CDS contract has since fallen to 21, signalling that investors are reposing faith in the institution.

“Investors are all convinced about the bank’s financial strength, although some of them enquired initially about leadership-related issues,” said an investment banker who was associated with ICICI Bank bond sales.

The CDS market is only available offshore, although liquidity is not high. But it is the only gauge of investor risk appetite.

Back home, mutual fund investors in ICICI Bank bonds, too, appear unfazed.

“We have not approached the bank raising any concern,” said Kumaresh Ramakrishnan, headfixed income, DHFL Pramerica Mutual Fund. “We are still comfortable with the bank’s repayment capability. It is a top-rated bank. Its franchise remains strong as individuals have little influence over the institution. Buyers still want to own the bank’s debt papers.”

Mutual funds including Aditya Birla Sun Life, Reliance, Axis, DHFL Pramerica, Kotak, and ICICI Prudential have collectively invested in the bank’s bonds across 63 schemes, with a total investment of ?3,280 crore (until February end), show data from Value Research.

“Bond investors are not a worried lot as the bank has a sound balance sheet,” said Lakshmi Iyer, CIO -debt and head-product, Kotak AMC. “The ongoing issue is not indicative of any deterioration in the bank’s balance sheet yet. Debt investors evaluate balance sheet health with respect to any credit before initiating any action, and it would be true for banking sector exposure as well.”

Although secondary market trades are limited, there are buyers of bonds. Yield spreads between similar corporate bonds and ICICI Bank bonds have largely remained constant.