Concern over MF industry's debt exposure getting worse

Mutual fund houses hold Rs 3,400 crore of Yes Bank's 'riskier' bonds. Reliance MF, Franklin Templeton MF and UTI MF account for bulk of these exposures.

Illustration: Uttam Ghosh/Rediff.com

The concerns on Rs 24-trillion mutual fund (MF) industry’s debt exposures don’t show any signs of easing.

MFs’ exposure to additional tier-I (AT-I) bonds of YES Bank - downgraded two notches and termed ‘riskier’ by rating agency ICRA on Wednesday - was Rs 3,383 crore as of June-end.

The data analysis is by Morningstar.

ICRA has said these AT-I bonds are hybrid subordinated instruments, with equity-like loss absorption features.

“Such features may translate into higher levels of rating transition and loss severity vis-à-vis conventional debt instruments,” it says.

Reliance MF had Rs 2,215 crore of exposure, the majority, to these bonds on June-end.

Franklin Templeton MF (Rs 544 crore) and UTI MF (Rs 370 crore) were the other fund houses with sizable exposure to the AT-I Bonds.

The figures could have changed since that date.

Overall, nine fund houses had exposure to these AT-I bonds.

Kotak MF (Rs 116 crore), Baroda MF (Rs 66 crore), DHFL Pramerica MF (Rs 46 crore) and Sundaram MF (Rs 12 crore) were among the others.

Queries sent to these didn’t elicit any response at the time of going to press.

Rahul Pal, head of fixed income of Mahindra MF, said: “We expect to bring down our exposure in the next few months.

"We have small exposure to these bonds, less than 2.5 per cent of the NAV (net asset value) of our Credit Risk Yojana.”

At end-June, their Credit Risk Yojana had Rs 4.3 crore of exposure (2.7 per cent of the scheme’s net assets) to the bank’s AT-I bonds.

ICRA has downgraded these bonds from ‘A’ to ‘BBB-plus’ and reiterated the loss-absorption feature that make these riskier.

The bonds accounted for Rs 10,800 crore of YES Bank’s bond programme.

The other bonds that accounted for Rs 22,112 crore were only downgraded a single notch.

ICRA explains that the AT-I bonds are riskier as the coupon payments are non-cumulative and discretionary; the bank has full discretion to cancel the coupon payments.

Further, the cancellation of discretionary payments shall not be an event of default.

And, though the coupon can be paid through profits or reserves and surpluses, this is subject to the bank meeting various minimum regulatory requirements such as common equity tier-I, tier-I and total capital ratios (including the capital conservation buffer), in line with Basel-III norms.

Hence, it has said, the rating is now three notches lower than that of the Basel-III-compliant tier-II bonds of YEs Bank.

Fund managers say there is a possibility in the immediate term of a mark-to-market impact (a revaluation at current prices) on the AT-I bonds due to the rating action.

“At BBB-plus, the bond is still investment grade; so, there is no write-down.

"However, capital loss can happen if the valuation yield goes up, if the market tries to price the rating change,” said a sectoral official, requesting anonymity.

However, some of the fund managers maintain a positive medium-term to long-term outlook.

“The bank can absorb provision requirements on the existing non-performing assets through its core earnings.

"The management has clearly guided (forecast) for an equity raise in this quarter, which will provide further capital buffer,” said one.

ICRA has also maintained a negative outlook due to the stress build-up in the bank’s loan book and weaker capital buffers.

“With a sizable increase in gross non-performing assets and BB and below-rated exposures, along with the weakened capital cushions, the outlook on the ratings remains negative.”