MF schemes exposed to Altico see 1-8% dip in NAVs after rating downgrade

After corporate entity is downgraded to 'D', fund houses need to take at least 75% markdown

Mutual fund (MF) schemes holding Altico Capital’s debt papers saw a 1-8 per cent dip in their net asset values (NAVs) on Friday, after the company was given ‘D’, or the default grade rating. 

UTI MF, along with Reliance Nippon Life Asset Management (RNam), has 15 schemes exposed to the troubled developer financier, which defaulted on its interest obligations related to an external commercial borrowing on Thursday.  

According to sources, the sharp drop in the NAVs of these schemes is on account of the steep markdowns that fund houses are required to take when the corporate entity is downgraded to ‘D’. “According to the norms laid down by the Securities and Exchange Board of India and the Association of Mutual Funds in India, a downgrade to ‘D’ warrants at least a 75 per cent markdown, if it is a secured exposure,” said an industry official.

Email queries sent to UTI MF and RNam didn’t elicit any response at the time of going to press. Overall, the two fund houses had Rs 537 crore of debt exposure to Altico Capital as of August-end, showed the data from Value Research. 

The drop in NAVs of most of the fixed-maturity plans (FMPs) of these fund houses was sharper than the open-end schemes holding Altico’s debt papers. Of the 13 FMPs, 12 saw their NAVs fall between 4 per cent and 8 per cent.  “FMPs typically have more concentrated exposures, as the asset-size of these close-end schemes tend to be smaller. So, the impact on NAVs from a credit event can be higher,” said a fund manager. 

However, as the maturities of these close-end FMPs are a long time away, the impact on investors may not be immediate. Five of the six FMPs belonging to UTI MF are maturing in 2021, while one is set to mature in 2020, showed the data from Value Research. In the case of RNam, all its seven FMPs will be maturing in 2022. Overall, these 13 FMPs had exposure of Rs 186 crore to Altico’s debt papers, with the median exposure of these schemes at 9.6 per cent of scheme assets.  Among the open-end schemes, RNam’s Ultra Short Duration Scheme is currently in the middle of its load-free exit window for investors, which is a mandatory requirement before a scheme can avail the side-pocket mechanism. On Friday, the scheme’s NAV fell 3.96 per cent. 

After completion of the 30-day load-free exit window on September 24, the scheme will side-pocket the affected Altico exposure in a separate portfolio. Effective September 13, the scheme has suspended fresh subscriptions, so that recovery of Altico’s credit quality only benefits the existing investors on the day of the credit event. As of August-end, the scheme had a combined Rs 150 crore of exposure (4.6 per cent of scheme assets) to two of Altico’s corporate bonds, with one of these maturing on September 26, 2019.  

UTI MF’s Credit Risk Fund saw its NAV drop 5.7 per cent. On Friday, the fund house said it would immediately create a side-pocket to hold the affected Altico’s debt papers in a separate portfolio. The side-pocket would mean the original NAV of the scheme would get split to the extent of the affected exposure. Originally, the scheme had Rs 200 crore of exposure (5.69 per cent of scheme assets) to Altico’s debt papers.  On Friday, India Ratings & Research had downgraded the bank loan of Altico to ‘D’. The non-convertible debenture of the company was downgraded to ‘C’ grade.  On Thursday, CARE Ratings had downgraded the proposed debentures of Altico from ‘AA-’ to ‘B’, i.e., below investment grade.