MFs with exposure to RInfra stare at losses on downgrade of debt paper

As of June 30, at least 3 had total exposure of Rs 4.6 billion to the latter's debt paper

Mutual fund (MF) schemes exposed to Reliance Infrastructure (RInfra) are staring at mark-to-market losses, following the downgrade of the debt paper of the Anil Ambani-led firm.

Rating agencies have assigned a ‘D’ (default) status to RInfra’s debentures due to non-payment of debt obligations within the due date. As of June 30, Kotak Mutual Fund, Franklin Templeton MF and Reliance Nippon MF together had exposure of Rs 4.6 billion to the RInfra's debt instruments. The latest holdings couldn’t be ascertained, as fund houses have not yet made public their holdings for July.

Recently, CRISIL downgraded its ratings on Rs 5.8 billion of non-convertible debentures (NCDs) and Rs 1.2 billion of bonds issued by the company to ‘D’ rating.

According to experts, a corporate bond typically gets traded at higher spreads when a downgrade takes place and the exposed schemes bear mark-to-market losses.

 “In the case of RInfra, the company has been downgraded to default but it’d be a little early to press the panic button, unless RInfra’s deal with Adani Transmission falls through,” a fund manager said, on condition on anonymity.

Reliance MF in an e-mailed response said it had no exposure to RInfra as of July 31. However, the fund house is yet to upload its latest factsheet.

A spokesperson of Franklin Templeton MF said the fund house had no exposure to the plain-vanilla NCDs that were rated to ‘D’. “Our nominal exposure to RInfra is through the structured obligation route and linked to regulatory assets that will be recovered by R-Infra’s Mumbai electricity distribution business from its utility consumers. The ratings of our exposure to the security has always been and continues to be in investment grade,” the spokesperson said.

Kotak MF didn’t respond to the queries.

India Ratings has downgraded RInfra’s NCDs and term loans below the investment grade. The agency downgraded R-Infra’s long-term issuer rating to ‘D’. The commercial papers of RInfra, which are backed by ICICI Bank’s standby letter of credit (SBLC), was the only instrument that didn’t see any downgrade.

This is not the first time that fund houses have been exposed to companies facing rating downgrades. In 2015, investors in two debt schemes of JPMorgan MF had borne the brunt of credit rating downgrades of troubled automobile component maker Amtek Auto’s debt instruments. This followed a delay in repayment of debt to JPMorgan, which brought in restrictions on withdrawal by investors.

In mid-February 2016, net asset values (NAVs) of select debt schemes at Franklin and ICICI Prudential had declined as much as 1.5 per cent a day after the first cut of ratings on JSPL securities to junk category, before further downgrade to default, on account of its debt burden.

RInfra recently said it expected to close the sale of its Rs 190-billion integrated power distribution business in Mumbai to Adani Transmission in this month. However, India Ratings has highlighted that even though RInfra expects to receive a total deal value of Rs 132.5 billion from the sale, the Maharashtra government’s intervention application for the receipt of taxes could reduce the amount available to RInfra for debt repayment.  

RInfra in a note to the exchanges stated it strongly disagreed with the rating action, as it was technical in nature. “The company has filed appeals with the rating agencies according to the extant Sebi (Securities and Exchange Board of India) guidelines. The revision is owing to our disclosure dated July 27 related to NCD payment of only Rs 6.7 billion, which is only four per cent of the total deal value of Rs 188 billion... The minor delay in debt repayment has arisen only because certain lenders have delayed their internal approvals for issuing NOCs for completing the transaction,” it said.

India Ratings has noted RInfra’s net debt was Rs 118.4 billion as of FY18, a little over four times its Ebitda.