Anil Ambani firms spell risk for MFs after 'below investment grade' rating

Reliance MF held exposure of Rs 1,083 crore to long-term non-convertible debentures (NCDs) of RHFL

Mutual fund (MF) investors could once again be facing mark-to-market losses on their debt investments, following multi-notch downgrades of debt papers of Reliance Home Finance (RHFL) and Reliance Commercial Finance (RCFL).

Reliance MF, which had exposures to the two entities, said, “Till the maturity of the instruments is in line with the Securities and Exchange Board of India (Sebi) regulations, there will be a mark-to-market valuation impact on the above exposure, basis revised valuation provided by independent valuation agencies, with corresponding impact on NAVs of schemes holding these investments.”

Reliance MF, a joint venture between Nippon Life and the Anil Ambani group firm Reliance Capital, held exposure of Rs 1,083 crore to long-term non-convertible debentures (NCDs) of RHFL. Another Rs 535 crore of exposures were towards NCDs of RCFL. 

Reliance MF added that as RHFL and RCFL stated their intent to service all loan obligations in a timely manner by expediting their asset monetisation plans, the interests of its investors remain protected.

Responding to an e-mailed query, UTI MF, said, “Our investments in the non-convertible debentures of RHFL have been downgraded to ‘C’ and not ‘D’, that is, there has been no default as the bonds are due in 2020 and 2021. However, as the bonds are now rated ‘below investment grade’, we will be valuing it accordingly, in line with Sebi’s guidelines in this regard.”

UTI MF's exposure to RHFL stood at Rs 70 crore as of March 31, 2019, which was spread in varying amounts in its nine fixed maturity plans (FMPs). On an average, seven per cent of these FMPs’ assets were exposed to the housing finance company, according to data from Value Research.

Experts say MFs may need to take haircuts on the downgraded exposures. “Typically, when a paper is downgraded to below investment grade (any grade below BBB-), fund houses take 10-15 per cent haircut on those papers. The fund house would need to take a call after assessing the specific case,” said a debt fund manager, requesting anonymity.

Sebi’s new norms on uniformity of valuations require MFs to take “indicative haircuts” on the exposures downgraded to ‘below investment grade’ from the date of the credit event. Such haircuts would be in force till valuation agencies compute the new price for such securities.

Only by giving a detailed explanation, fund houses can deviate from indicative haircuts or valuation price given for such securities.

Overall, MFs held exposure of Rs 1,940 crore to RHFL. Besides, Reliance MF and UTI MF, SBI MF held exposure of Rs 787 crore to RHFL. However, an e-mailed query sent to the fund house didn’t elicit any response.

According to sources, some debt schemes also have exposures to RCFL, the other entity downgraded to ‘below investment grade’.

On Friday, CARE Ratings downgraded long-term debt programme of RHFL to ‘D’ (grade for instruments in default or expected to be in default), while downgrading other instruments to ‘C’. Earlier, these instruments were rated BBB-plus and in some cases, BBB.

The rating agency said the downgrade took into account delays in servicing of bank facilities and delay in raising funds from asset monetisation, which put liquidity profile of group companies under stress.

The rating note further said the parent (Reliance Capital) may not be in a position to extend adequate support to its subsidiaries.

 

On its note on RCFL, the rating agency added that it also took into account the recent instance of re-scheduling of NCDs.

On Friday, Reliance Capital's commercial papers were downgraded from A2 to A4 by ICRA (implying minimal safety regarding timely payments).

Meanwhile, the Anil Ambani group companies have clarified their stance.

RHFL has said that its only facing delay in repayments to the banks. 

“RHFL has been affected by a timing mismatch in regard to the ongoing further securitisation / monetisation proposals with banks, etc., and the same has resulted in minor delay on principal repayments aggregating to only Rs 542 crore to around five-six banks, and limited only to its bank borrowings. RHFL expects to regularise all such repayments very shortly," the company's statement read. 

While citing the challenging environment after Infrastructure Leasing and Financial Services crisis, RHFL re-iterated that it is “completely current and regular in servicing interest on its entire debt as on date”. Further, it added that it is also “current and regular on principal repayments on all its capital market borrowings aggregating to Rs 7,708 crore”.

In the same vein, RCFL clarified that there is minor delay on principal repayments of Rs 477 crore to five-six banks and that these are limited to its bank borrowings.