The trouble at YES Bank has brought more pain to debt fund investors, with over Rs 2700 crore of investments in debt funds on the verge of getting wiped out.
On Friday, rating agency ICRA has downgraded all bonds issued by YES Bank to the default rating of 'D after factoring in the impact of government placing YES Bank under moratorium,
As on January end, over 30 schemes across 11 fund houses have exposure of over Rs 2,800 crore to YES Bank’s debt instruments. With the downgrade, prices of YES Bank’s debt instruments have taken a hit and so have the NAVs of these debt schemes.
The government placed YES Bank under moratorium on Thursday for a period of 30 days and capped withdrawals from the bank at Rs 50,000. Moreover, the bank was restricted from making payments of over Rs 50,000 to any of its creditors.
These factors prompted ICRA to downgrade all bonds of YES Bank, as the temporary prohibition would “adversely impact the ability” of the bank to timely service the liability on its deposits and bonds.
Moreover, RBI’s latest draft on YES Bank reconstruction suggests more pain is in store for debt fund investors. The banking regulator proposed in a draft that Additional Tier 1 (AT-1) bonds issued by YES Bank under Basel III framework should be written down to zero.
Kaustubh Belapurkar, Director, Fund Research, Morningstar Investment Adviser India says that if the RBI draft becomes the norm, of the total Rs. 2,800 crore exposure to YES Bank debt instruments, over Rs 2,700 crore in Basel III Compliant AT-1 Bonds has to be marked down to zero by fund houses.
AMCs’ response
Given the uncertainty over recovery of their debt exposure in YES Bank, some fund houses have started enabling side pocketing in the affected schemes.
At the time of writing this article, 4 fund houses – Nippon India MF, Baroda MF, PGIM India MF and UTI MF - have announced creation of segregated portfolios in the affected schemes.
Nippon India MF, which has the highest exposure, enabled side pocketing in 5 schemes - Nippon India Strategic Debt Fund, Nippon India Credit Risk Fund, Nippon India Hybrid Bond Fund, Nippon India Equity Hybrid Fund and Nippon India Equity Savings Fund.
Baroda MF has enabled side pocketing in Baroda Treasury Advantage Fund and Baroda Credit Risk Fund. PGIM India MF has created side pocketing in PGIM India Credit Risk Fund. UTI MF enabled side pocketing in UTI Credit Risk Fund and UTI Medium Term Fund.
Broader picture
Fund managers feel this event will further worsen the credit market space, which is anyway under pressure due to the slowdown in the broader economy.
Moreover, given that liquidity conditions are likely to remain in surplus mode, returns from overnight and liquid funds and money market fund should also remain muted in line with the repo rate.
Pankaj Pathak, Fund Manager, Fixed Income, Quantum MF said, “There will be recommendations to allocate to credit risk strategies given the fall in yields of government bonds and AAA companies. However, as we have been highlighting for some time, we do not see the end of the credit crisis in the bond markets despite RBI’s actions, and crisis in the NBFCs, telecom and now banking sector are extension of the same crisis.”
He asked debt investors to apply extra caution while choosing debt funds; safety and liquidity should take precedence over returns from bond funds in this environment.
