Within 10 days of the last set of downgrades on Reliance Commercial Finance and two other Reliance ADAG Group companies – Reliance Capital and Reliance Home Finance, CARE Ratings has downgraded long term bank facilities worth₹12,700 crore of Reliance Commercial Finance from CARE BBB+ to Care D. According to CARE Ratings, a rating of ‘D’ means instruments in this category are either in default or expected to soon be in default. The ratings agency also downgraded another ₹5,000 crore worth debt of Reliance Commercial Finance to CARE C from BBB+. 13 mutual fund schemes across 4 AMCs are exposed to Reliance Commercial Finance.
CARE Ratings cited rescheduling of NCDs and delays in repayment of bank loan facilities as the rationale for its action. It added that the “liquidity profile of the group continues to be under stress on account of delay in raising funds from the asset monetisation plan and impending debt payments.” Along with Reliance Commercial Finance, two other Reliance ADAG Group companies were downgraded on 18th and 19th April, one by CARE and another by Brickwork Ratings which we wrote about here.
The AMCs exposed to Reliance Commercial Finance are Reliance Nippon AMC, Aditya Birla Sun Life AMC, DHFL Pramerica AMC and L&T FMP. 8 out of the 13 schemes are Fixed Maturity Plans (FMPs). As a percentage of scheme assets, exposures extend up to 13.6% in case of DHFL Pramerica Short Maturity Fund according data released by Value Research as on 31st March 2019. The downgrades come at a time when the mutual fund industry is reeling from downgrades or delayed payments from troubled groups like IL&FS, Essel and DHFL. “There is nothing investors can do, once locked into an FMP,” said Lovaii Navlakhi, Founder and CEO, International Money Matters Pvt. Ltd. “The problem arises at investment stage, with the thinking that an FMP is an FD with tax benefits. I expect that SEBI will further tighten the issuer and group exposure norms on these products.”
It is unclear how much debt held by mutual fund schemes has been individually affected by the downgrade. A spokesperson from DHFL Pramerica AMC in an e-mail to Mint responded by stating, “Our exposure to Reliance Commercial Finance is a structured transaction based on the credit enhancement offered by the Parent – Reliance Capital which is rated Care A. As such our structure also carries the rating of Care A (So). There is no change in the ratings of our instrument despite the change in rating of Reliance Commercial Finance on a stand-alone basis.”
Kotak Mutual Fund recently held back some of its FMP units against payments due from the Essel Group and HDFC Mutual Fund rolled over (extended) the maturity of one of its FMPs with Essel exposure. A surge of redemptions from some AMCs like DHFL Pramerica Mutual Fund has also caused their exposures to the troubled groups to breach SEBI limits. The Regulator has not initiated any penal action in this regard at this point of time. Kalpesh Ashar, Founder, Full Circle Financial Planners and Advisors, pointed to three aspects of the current crisis in debt funds and FMPs. “First, fund managers have prioritized yield generation over investor safety. Second, too much money entered debt mutual funds without sufficient corresponding depth in the bond market. Third, AMCs are not communicating troubles with their holdings until the very last minute or sometimes after a default has happened. This aggravates the problem,” he said.
Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.