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Debt mutual fund investors could be looking at losses, again

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Investors in some debt and hybrid mutual funds are staring at losses after rating agency CARE cut its ratings on Reliance Home Finance’s long-term debt programme of Rs 4,979 crore and long-term bank facilities and nonconvertible debentures worth Rs 12,700 crore to default.

Three mutual fund houses including Reliance Nippon Asset Management, SBI Mutual Fund and UTI Mutual Fund have exposure to papers of Reliance Home Finance and Reliance Commercial Finance in their portfolios worth Rs 2,405 crore, as per data from Morningstar India. While Reliance Nippon has an exposure of Rs 1,546 crore, SBI Mutual Fund holds papers worth Rs 788 crore. UTI Mutual Fund has exposure to the tune of Rs 71 crore in its portfolio.

This is the third blow to debt mutual fund investors in the last one year. After IL&FS was downgraded to default ratings, many fund houses had to write off their investments in its securities, leading to losses for investors in various debt schemes, which held these papers. Some fund houses have given time to Subhash Chandra’s Essel Group till September to pay their liabilities. Some fixed maturity plans (FMPs), which held Essel Group papers, had to return lesser money to investors after they matured recently.

CARE also downgraded its ratings on some NCDs, principal protected market linked debentures, subordinated debt, NCD public issue and upper Tier 2 bonds of Reliance Home Finance and Reliance Commercial Finance to ‘C’.

Fund managers will have to mark down the value of these papers, which will in turn lead to lower NAVs of schemes holding them. It could not be immediately ascertained by what quantum or percentage fund managers will mark down these investments.

“Once the rating falls below investment grade, rating agencies do not provide valuation for these bonds. It is left to the investment committee of the fund house to value these securities,” says Kaustubh Belapurkar, director (fund research), Morningstar India.

Reliance Mutual Fund has exposure to these bonds in its fixed maturity plans, credit risk, equity hybrid, equity savings, hybrid bond, strategic debt, ultra short duration funds.

A Reliance Mutual Fund spokesperson said, “Reliance Mutual Fund (RMF), in like manner as certain other MFs, has exposure of Rs 535 crore and Rs 1,083 crore to longterm NCDs issued by Reliance Commercial Finance and Reliance Home Finance. These exposures are held in only roughly 10% of Reliance Mutual Funds’ total 166 fixed income & hybrid schemes.”

Reliance Mutual said the managements of the issuer companies, which are part of Anil Ambani’s Reliance Group, have stated their intent to service all capital market and other loan obligations in a timely manner on the respective due dates through “fast track asset securitisation / monetization”. Reliance Mutual Fund is also part of the group.

“….Till maturity of the instruments, and in line with 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.”

SBI Mutual Fund has exposure to these securities in their FMPs, credit risk, equity hybrid and children’s benefit funds.

Emails and phone calls made to SBI Mutual Fund did not elicit any response.

UTI is holding Reliance papers in its fixed term income funds.

In response to a query, a UTI Mutual Fund spokesperson said, “Our investments in the NCDs of the company have been downgraded to “C” and not “D”, that is – there has been no default as the bonds are due in 2020 & 2021. However, as the bonds are now rated below investment grade, we will be valuing it accordingly, in line with SEBI guidelines in this regard.”

MF exposure to debt in Reliance Commercial Finance and Reliance Home Finance
Fund house Amount (Rs crore)
Reliance 1,546
SBI 788
UTI 71
Total 2,405
As on March 31, 2019; source: Morningstar India

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