The concerns on Rs 24-trillion mutual fund (MF) industry’s debt exposures don’t show any signs of easing. According to industry data, the MF industry’s exposures to the additional tier I (AT-I) bonds of Yes Bank -- which were downgraded by two notches and termed ‘riskier’ by ICRA – stood at Rs 3,394 crore as of June-end.
The AT-I bonds of Yes Banks are hybrid subordinated instruments with equity-like loss-absorption features. “Such features may translate into higher levels of rating transition and loss severity vis-a-vis conventional debt instruments,” the rating agency pointed out.
The majority of the exposure was held by Reliance MF, which had Rs 2,216 crore of exposure to these bonds. Franklin Templeton MF (Rs 550 crore of exposure) and UTI MF (Rs 370 crore of exposure), were the other fund houses with sizeable exposure to the AT-I Bonds. Queries sent to the fund houses didn’t elicit any response at the time of going to press.
Overall, ten fund houses had exposures to Yes Bank’s AT-I bonds as of June-end. Kotak MF (Rs 116 crore), Baroda MF (Rs 66 crore), DHFL Pramerica MF (Rs 46 crore) and Sundaram MF (Rs 12 crore) were among the other fund houses with exposure to the lenders’ AT-1 bonds.
On Wednesday, the rating agency downgraded the AT-I bonds from A to BBB-plus, and also re-iterated that the loss-absorption feature made these bonds riskier. The AT-1 bonds accounted for Rs 10,800 crore of Yes Bank’s debt programme. The other bonds that accounted for Rs 22,112 crore of the bank’s bond programme were only downgraded by a single notch.
ICRA said that the AT-I bonds were riskier as the coupon payments are non-cumulative and discretionary and the bank has full discretion to cancel the coupon payments. Further, the cancellation of discretionary payments shall not be an event of default.
The agency also added that even though the coupon can be paid through profits or reserves and surpluses, the payment is subject to the bank meeting various minimum regulatory requirements such as common equity tier I, tier I and total capital ratios (including capital conservation buffer) in line with Basel III norms.
The rating agency said that due to the above features, the rating of the Basel III compliant AT-I bonds is three notches lower than rating of Basel III compliant Tier II bonds of Yes Bank.
Fund managers say in the immediate term there is possibility of mark-to-market impact on the AT-I bonds due to the rating action. “At BBB-plus, the bond is still investment grade, so there is no write-down. However, capital loss can happen if the valuation yield of the bond goes up, if market tries to price the rating change,” said an industry official, requesting anonymity.
However, some fund managers are positive in the medium- to long-term. “The bank can absorb provision requirements on the existing non-performing assets through its core earnings. The management has clearly guided for equity raise in this quarter, which will provide further capital buffer,” said a fund manager.
Meanwhile, ICRA has maintained a negative outlook due to the stress build-up in the loan book and weaker capital buffers. “With a sizeable increase in gross non-performing assets and BB and below-rated exposures, along with the weakened capital cushions, the outlook on the ratings remains Negative.”