JSPL downgrade puts Franklin and ICICI Prudential in a spot

Within six months of the Amtek Auto episode involving JP Morgan AMC, which created a stir in India's mutual fund sector and forced the market regulator to intervene with stricter debt norms, the Rs 13 lakh-crore asset management sector is hit with yet another downgrade. The firm in focus this time is Jindal Steel & Power (JSPL).

Two big fund houses — ICICI Prudential Mutual Fund and Franklin Templeton Mutual Fund — have a Rs 2,600-crore exposure to the papers of the company from the troubled steel sector.

The debenture issuance by JSPL offered a coupon rate of 10.48 per cent.

Early this week, rating agency Crisil had downgraded JSPL’s long-term rating from BBB+ to BB+ with a cautionary note that the group's liquidity would deteriorate significantly in the near-term as the stake sale in rolling mill and the receipt of the proceeds from settlement in Bolivia might take longer.

Franklin Templeton Mutual Fund has an exposure of Rs 2,100 crore in JSPL group, while ICICI Prudential AMC has nearly Rs 500 crore of exposure. Although the latter's overall exposure is merely 0.31 per cent of its overall debt assets under management, one of its schemes — ICICI Prudential Regular Savings Fund — has 2.91 per cent of its Rs 5,245-crore asset size in JSPL's debt instruments as on January 31, 2016.

A spokesperson of ICICI Prudential AMC said, “Our exposure on the said company is very measured as compared to our total debt funds under management. In terms of our experience, with this investment, the company has serviced all its debt obligations to us in time and the mutual fund industry has seen repayments by the company of more than Rs 2,000 crore over the last few months.”

Further, supporting the investments in the downgraded instrument, the spokesperson added, “The minimum import price guidelines introduced by the government will help in improving the revenues of the company.”

The net asset value of ICICI Prudential Regular Savings Fund declined 0.54 per cent to Rs 15.57 on Tuesday after the downgrade.

“Debt funds normally own a number of individual bonds across maturities and sectors to limit the impact of an adverse development on overall performance. While we are monitoring the situation, we would like to point out that upgrades and downgrades of securities are part of every corporate bond portfolio. Also, specific to this matter, it is important to note that the introduction of minimum import price by the Indian government should help the steel industry in the medium term,” said a Franklin Templeton spokesperson.

According to Dhirendra Kumar, chief executive officer of Value Research, it's just a downgrade and not a default. “Such downgrades are part and parcel when it comes to investment. There could be the possibility of further downgrades as economy is reeling under recession and commodity-based sectors are under deep stress. But, fund houses have taken a measured call and they have collateral, too.”

Experts say although there might be concerns around the downgrade, investors need to consider that all exposures are valued at fair values on a daily basis in line with Sebi guidelines. According to them, while the downgrade might result in some volatility in returns in near term, investors need to be assured that the schemes would continue to deliver returns over longer term according to their mandate and, hence, need not panic.