Debt mutual fund woes deepen after Anil Ambani groups firms’ downgrade

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Published: April 30, 2019 5:24:00 PM

Debt funds continue to remain under pressure after Rating agency CARE downgraded the long-term debt facilities of Anil Ambani-led group firms' Reliance Home Finance and Reliance Commercial Finance to default status.

Debt funds continue to remain under pressure after Rating agency CARE downgraded the long-term debt facilities of Anil Ambani-led group firms’ Reliance Home Finance and Reliance Commercial Finance to default status. Notably, CARE Ratings has now downgraded long-term bank facilities worth Rs 2,700 crore of Reliance Commercial Finance from CARE BBB+ to Care D. Further, ICRA has also downgraded the rating on Reliance Capital to sub-investment grade. 

Following the development, Reliance mutual fund said that it will write down the value of holdings in these two entities. The firm has an exposure of Rs 535 crore and Rs 1,083 crore to long-term non-convertible debentures (NCDs) issued by RCFL and RHFL, respectively, and these were held in around 10% of RMF’s total 166 fixed income and hybrid schemes.

Also read: Kotak Mahindra Bank Q4 net profit jumps 25% on-year, asset quality stable; key figures in a nutshell

According to a report by global research firm Credit Suisse, up to 15% of debt mutual funds’ total assets under management are accounted for by four stressed companies – Dewan Housing Finance, Essel group, IL&FS and Anil Ambani group. These four companies together owed a whopping Rs 3.6 lakh crore to lenders as at the end of March 2018. “In addition to the MF exposure, the exposure to four stressed groups (Dewan, Essel, IL&FS & ADA Group) for the banks and NBFCs is large, at 1 to 6 per cent of loans and 10-50 per cent of net worth,” Credit Suisse said in a report.

The firm noted that the bunching up of these downgrades is set to hurt inflows into debt mutual funds. This in turn can hurt funding available to NBFCs, as about 27% of total debt AUMs are lent to NBFCs, according to a CNBC TV18 report. “This will have an impact, as debt mutual funds with exposure to these groups may see slower inflows. There are a few problem companies. We have had this in the past too, but this time the magnitude is much greater,” Mahendra Jajoo, Head – Fixed income at Mirae Asset Global investment told CNBC TV18.  

According to the expert, investors now face uncertainty as to how much more pain is there. Since the markdown process is not clear, people may not be sure as to how much they will get back, he said. However, as more clarity emerges, people will be able to isolate the problem areas, he added. 

Nilesh Shah of Kotak AMC says that there has been pressure of refinancing on many companies.  “There will be challenge for debt market in the days to come, but like September 2018, how we mitigated well; enough, we should be able to navigate these troubled waters also,” he told the channel.

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