Various mutual funds continue to have substantial exposure to debt papers of companies that have either witnessed a downgrade in credit ratings or revision in credit outlook so far in 2015-16.
Data compiled by Value Research shows that as of August 31, several debt schemes had significant holdings in Jindal Steel & Power, Hindalco, Vedanta, and Magma Fincorp — companies that have faced rating downgrades to their long- or short-term debt instruments in the past six months by at least one of the leading rating agencies including Care, Crisil and Icra.
Moreover, their holdings in debt instruments of companies such as SAIL, DLF, Tata Teleservices, Bank of Maharashtra and Bank of India, for which the credit outlook has been lowered in the previous six months, remain substantial.
On their part, fund houses argue that similar to a equity scheme, the range of debt papers under one particular scheme could be diverse and does not solely reflect the risk profile of the scheme itself.
According to Rahul Bhuskute, Head Credit and Structured Investments at ICICI Prudential Asset Management Company of fixed income at ICICI prudential Asset Management Company, upgrades and downgrades are part of life for mutual funds which invest in corporate bonds. They are like upward and downward movement of share prices for equity funds.
“Hence, just like in an equity fund, the overall performance of the portfolio is looked at, similarly in a debt fund one should look at the overall fund performance,” said Goswami.
However, since credit downgrade of Amtek Auto by rating agencies led to a sharp decline in net asset value (NAV) of two of the debt schemes of JP Morgan AMC in late August, the credit profile of Indian companies, especially from the troubled commodity and investment-linked sectors, has been in focus.
While it was reported that after the Amtek Auto debacle, the Securities and Exchange Board of India (Sebi) asked JP Morgan AMC to present their books to examine the systems followed for investments in Amtek, there were also reports that the market regulator asked various AMCs to provide information on their exposure to Jindal Steel & Power after rating firm Icra had lowered the company’s rating.
Data shows that 46 mutual fund schemes, including several fixed maturity plans (FMPs), held exposure to various debt instruments — commercial papers, debentures and structured obligations — of Jindal Steel & Power as of August 31, with maturities ranging from November 2011 to March 2021.
All AMCs FE approached, while declining to comment on specific holdings of their schemes, argued that security selection in debt schemes follows a bottoms-up approach and a multi-layered in-house credit process besides considering grading by credit rating agencies as inputs.
As such, metal companies have seen higher downgrades this fiscal and while all the dozen revisions do not signify any serious problem, the number of ratings and outlook downgrades reflects the weakening financial of companies.
Compilation of FE shows that at least 29 and 60 schemes held debt securities of Hindalco and Vedanta, respectively, with maturity from 2016 onward. Crisil lowered long-term credit ratings of these companies to AA- and AA in April this year.
According to a spokesperson of Franklin Templeton Investments, every sector will have both strong and weak companies, and it is wrong to paint every company with the same brush. “Generally speaking, the overall credit environment in India is improving with numerous rating upgrades in the past one year and if one were to analyse our bond fund portfolios; the number of upgrades in the last year is substantially higher than the number of downgrades,” the spokesperson said.
More metals producers could be downgraded, said analysts, as they see several steel producers reporting negative operating cash flows in FY16, with around half of steel producers reporting loss in the three months to June 2016.
Acknowledging that the deterioration in credit parameters in the metals space is on account of high leverage and a weak cycle, Akhil Mittal, senior fund manager, Tata Mutual Fund, said the AMC is vigilant on the sector. “ We also take note that issuers have undergone through a lot of stress and balance sheet deterioration although further stress cannot be completely ruled out.”
AMCs said their rating strategy also give weight to the track record of promoters and parent companies of a business. They are drawing comfort from the fact that companies such as SAIL, Bank of Maharashtra and Indian Overseas Bank are owned by the government or entities like Vedanta and Hindalco have cash-making subsidiaries or established promoter group.