Fund managers turn wary of debt-heavy firms

After the Amtek Auto episode, money managers have become wary of holding or investing in corporate debt of companies with high loans.

Select companies in sectors such as steel, real estate, telecom and retail are being avoided. Fund managers believe the yields on these papers might spike if the credit environment worsens. Yield and price move in opposite directions -- a rise in the former means a reduction in the latter and could result in a mark to market loss (writing down the value of assets in line with current prices) .

Fund managers are identifying “risky” paper in their portfolio and trying to liquidate these. “All managers are adopting a safety-first approach. Debt instruments seen as risky are being offloaded. However, as the secondary markets aren’t much liquid, one cannot say with certainty whether there will be buyers,” said a chief investment officer of a fund house, who wished not to be named.
 

Yields in the corporate bond markets have already been rising over recent weeks.

“One needs to be cautious about risks attached with companies that have high debt. To make an extra 25 basis points, it doesn’t make sense to bet crores of rupees on papers which might turn bad,” said a head of fixed income of a midsize fund house.

Last month, JPMorgan MF had to restrict redemptions in two of its debt schemes, which had exposure to debt paper of Amtek Auto, after the latter was downgraded by rating agencies.

Fund managers said they'd increased the scrutiny while investing in debt paper. Previous record, liquidity, cash flows and parentage are key metrics. Coupon on offer cannot be the primary consideration, said experts.

Managers are more comfortable with debt issuances of companies like Tata Steel, Hindalco and Steel Authority of India, which have good promoter backing.

Currently, the domestic MF sector has debt assets worth Rs 9 lakh crore, a third of which is into corporate debt.