Recent downgrades of Altico Capital and Anil Ambani's Reliance Business Broadcast News Holdings (RBBNH) have once again shocked the Rs.26 lakh crore MF industry.
Last week, Altico Capital, a lender focused on the real estate sector, failed to pay around Rs.20 crore of interest on an External Commercial Borrowing (ECB) to a UAE based financial institution. Following this default, Altico was downgraded by multiple credit rating agencies.
Consequently, NAV of a few debt schemes of UTI MF and Reliance MF took a beating. As on August 31, UTI MF’s seven debt schemes held around Rs.334 crore of Altico Capital securities, while exposure of Reliance MF’s nine debt schemes stood at around Rs.204 crore.
In a separate event, CARE Ratings downgraded the non-convertible debentures (NCDs) of RBBNH to ‘D’ or default grade. The downgrade was following a delay in debt servicing of one of the NCDs that matured on September 11.
RBBNH’s credit rating downgrade had an impact on three fund houses — PGIM India, UTI and L&T. As on August 31 this year, debt schemes of these three fund houses held securities of Rs.654.5 crore in RBBNH, shows data compiled by Value Research.
While exposure of PGIM India MF’s nine schemes was around Rs.202 crore, 15 schemes of UTI MF held Rs.380 crore and 3 schemes of L&T MF held Rs.71.5 crore as on August 31, shows Value Research data.
Among the worst hit schemes were PGIM India Short Maturity Fund and PGIM India Ultra Short Term Fund, as NAV of these two schemes declined by nearly 30% and 21%, respectively, a day after the downgrade.
AMCs’ reaction
Following the downgrade of Altico Capital, UTI MF created a segregated portfolio in UTI Credit Risk Fund on September 13. This means investors can exit the scheme in the next 30 days without paying any exit load.
Reliance MF had already enabled side pocketing in Reliance Ultra Short Duration Fund before the downgrade episode took place. The 30 days load free period for this scheme will end on 24th September 2019. Following the downgrade, fresh inflows to this scheme were suspended till September 24.
Other AMCs have not come up with any such provisions so far.
While open end debt fund investors have an option to exit, FMP investors will have to live with it.
Experts take
MF analyst Vidya Bala feels that these episodes are another reminder of risks involved in FMPs. “I have always considered open-ended debt schemes better than FMPs from a risk-reward perspective. Investors should not chase returns in debt funds and look at it only as a tool to diversify their asset allocation,” she said.
Nevertheless, a comforting factor for investors is AMCs are more willing to do side pocketing, she added.
However, a few experts believe that all is well despite recent incidents of downgrades. Rahul Jain, Senior VP Research at International Money Matters said that defaults by Altico Capital should not be seen as big a worry as IL&FS, as the company remains well capitalized with net-worth of Rs. 3108 crore as of June 30, 2019.
Earlier, UTI MF has also noted that Altico Capital has “enough cushion to clear dues for the lenders.”
Debt expert Joydeep Sen said that investors should not compare these downgrades with IL&FS fiasco. He, however, said that investors should invest in corporate bond funds and banking & PSU funds as these funds do not take credit risks.
