JSPL downgrade: Mutual Funds facing potential risk

After Amtek Auto crisis, some leading mutual funds are staring at potential risks from their over Rs 2,500-crore exposure to bonds issued by Jindal Steel & Power (JSPL), given the company's huge debt burden and downgrade in its ratings.
Franklin Templeton Mutual Fund is said to have exposure to the tune of over Rs 1,600 crore, while that of ICICI Prudential is estimated at nearly Rs 500 crore.
Among leading fund houses, Reliance Mutual Fund has an exposure of about Rs 49 crore to JSPL.
The shares of the company have been under tremendous pressure in the recent past, but the plunge has deepened further over the last couple of days following a credit rating downgrade by Crisil on Monday.

Earlier today, the BSE sought clarification from JSPL with regard to the reports about downgrade to below investment grade, to which the company was yet to respond.
The shares plunged by over 6 per cent in intra-day trade today, after a similar fall witnessed yesterday.

Industry analysts said the rating downgrade by Crisil, which has assigned a negative outlook on the company, may also result in decline in NAVs (net assets value) of mutual fund schemes with exposure to JSPL's debt papers.
The total exposure of mutual funds to JSPL's debt papers is estimated at more than Rs 2,500 crore.

When contacted, a spokersperson for Franklin Templeton MF said it was monitoring the situation.
Like any mutual fund, debt funds normally own a number of individual bonds across maturities and sectors to limit the impact of an adverse development on overall performance, the fund house said.
"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," the spokesperson said.

An ICICI Prudential MF spokesperson said it believes that investors would look at the overall picture and not get swayed by any single event.
"The risk management and investment team at ICICI Pru understands its responsibility and the trust that investors have placed on us and we remain committed to it.
"First and foremost, our exposure on the said company is very measured (0.31 per cent) as compared to our total debt funds under management. This is in line with our policy of not taking concentrated exposures," the fund house said.
The spokesperson further said that JSPL has serviced all its debt obligations in time.

"The MF industry has seen repayments by the company of around Rs 2,260 crore in the last quarter. Further the capital market exposure of the company is limited as compared to its total debt which should enable that its debt obligations are met in due course," ICICI Prudential MF said.
A spokersperson of Reliance MF said that the fund house has negligible exposure in the company and the security that fund holds has not been downgraded.
Last year, JP Morgan MF got into trouble due to its exposure to debt securities of Amtek Auto.
JSPL, which is into diverse segments including steel, cement and power, said in a recent investor presentation that it is focussing on reducing working capital and options to reduce interest costs.