{"id":417,"date":"2019-06-10T11:36:54","date_gmt":"2019-06-10T11:36:54","guid":{"rendered":"http:\/\/blog.certifiedfinancialguardian.com\/?p=417"},"modified":"2019-06-11T05:35:25","modified_gmt":"2019-06-11T05:35:25","slug":"how-is-dhfl-interest-delay-impacting-your-debt-mutual-funds","status":"publish","type":"post","link":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/2019\/06\/10\/how-is-dhfl-interest-delay-impacting-your-debt-mutual-funds\/","title":{"rendered":"How Is DHFL\u2019s Interest Delay Impacting Your Debt Mutual Funds"},"content":{"rendered":"\n

India\u2019s third-largest housing finance company, DHFL<\/a>, is gasping for fresh life. <\/p>\n\n\n\n

On June 4, 2019, DHFL delayed the interest payment on its Rs 850-crore\nworth Commercial Paper (CP). Following this event, the independent rating\nagencies downgraded DHFL debt to Default (D). <\/p>\n\n\n\n

Within just 4 months, DHFL\u2019s credit rating has taken a serious knock\nfrom \u201cAAA\u201d to \u201cD\u201d. <\/p>\n\n\n\n

What appeared as a liquidity issue initially has now developed into a\nfull-blown crisis for DHFL. Many experts are now suspecting it to be DHFL\u2019s\nsolvency issue, not just the asset-liability mismatch. <\/p>\n\n\n\n

While the Company management claims that it\u2019s honoured debt\nobligations of over Rs 40,000 crore since September 2018, the market believes\nit\u2019s going to default in future. And independent credit rating agencies have\nechoed these concerned. <\/p>\n\n\n\n

As a result, Non-Convertible Debentures (NCDs) with different\nmaturities have lost upto 20% in just one day with yields shooting upto 20%. <\/p>\n\n\n\n

Has DHFL caused any damage to the mutual\nfund industry?<\/strong><\/p>\n\n\n\n

The Indian mutual fund industry has an aggregate exposure of over Rs\n5,000 crore to DHFL papers. <\/p>\n\n\n\n

It sounds worrisome, doesn\u2019t it?<\/p>\n\n\n\n

Over 150 schemes will be affected if DHFL defaults on its future\nobligations. <\/p>\n\n\n\n

According to some media reports, DHFL Pramerica Medium Term<\/a> Fund experienced a 53% drop and Tata Corporate Bond Fund<\/a> witnessed 29.7% fall on account of a default by DHFL. <\/p>\n\n\n\n

Similarly, DHFL Pramerica Floating Rate Fund<\/a>, Baroda Treasury Fund<\/a>, BNP Paribas Medium Term Fund<\/a>, and UTI Short Term Income Fund<\/a> have suffered a loss of 48.4%, 17.2%, 12.9% and 9.4% respectively. <\/p>\n\n\n\n

Approximately 50 mutual fund<\/a> schemes\nfell over 5% in a single day following the DHFL\u2019s default. <\/p>\n\n\n\n

At the fund house level, UTI Mutual Fund<\/a> has been the top creditor of DHFL from the industry. On April 30, 2019, the fund house had an exposure of over Rs 1,700 crore to DHFL. Reliance Nippon Mutual Fund<\/a>, with its approximately Rs 1,200 crore of exposure, stood second. <\/p>\n\n\n\n

If you have noticed, we have been constantly cautioning investors\nabout schemes that have exposure to the debt of stressed\ncompanies. <\/p>\n\n\n\n

[Read:<\/strong> Are You Holding Debt Mutual Funds With Stressed Assets?<\/a>]<\/p>\n\n\n\n

What should investment professionals and\ninvestors do at this juncture?<\/strong><\/p>\n\n\n\n

Those who are stuck with the schemes that are exposed to DHFL can\nhardly do anything at this juncture. Booking losses and getting out of troubled\nmutual fund schemes whose portfolio characteristics is not up to the mark is\nperhaps the solution. <\/p>\n\n\n\n

DHFL has been trying to sell its maturing loan portfolios to banks and other investors to raise money to honour its obligations. It\u2019s managed to reach a definitive agreement to sell its entire stake in Aadhar Housing Finance\u2014India\u2019s largest independent affordable housing finance company\u2014to Blackstone. Moreover, Wadhwan Global Capital, a promoter group entity, has been trying to inject liquidity into DHFL by offloading various assets it owns. <\/p>\n\n\n\n

Some media reports also suggest that the promoters of DHFL may sell\ntheir stake in the Company within a month and may even lose the management\ncontrol. <\/p>\n\n\n\n

That being said, there is no point in being overoptimistic about these\ndevelopments either. Independent credit rating agency, ICRA (a Moody\u2019s Investor\nService Company) has cautioned creditors of DHFL in its note highlighting\nCompany\u2019s constraints. <\/p>\n\n\n\n

Though the company\u2019s borrowing\nprofile is well diversified, the recent industry-wide stress in liquidity has\nincreased dependence on securitisation (~Rs 17,000 crore raised between\nSeptember 24, 2018, and May 10, 2019). Moreover, DHFL is dependent on the\nrefinancing of maturing liabilities, given the relatively longer tenure of the\nloans inherent in the housing finance industry. <\/p>\n

While reliance on short-term borrowings through commercial papers has declined with the amount outstanding reducing to Rs 850 crore as on May 10, 2019, from Rs 8,715 crore as on September 30, 2018, the company would continue to depend on portfolio sales to meet its debt obligations till fresh funding resumes. DHFL reported a net fixed deposit outflow of Rs 1,356 crore during September 24, 2018, to December 31, 2018. <\/p>\n

The liquidity position of the company is also stretched as evidenced by the delay in meeting its debt obligation.<\/p>\n\n\n\n

As investment professionals, mutual fund distributors and investment\nadvisers should ideally check the portfolios of debt mutual fund schemes before\nrecommending them to investors given today\u2019s challenging situation.<\/p>\n\n\n\n

If debt schemes continue to accept fresh money, despite having\nexposure to stressed assets\/borrowers, advisors and investors should avoid them\nat all costs, or that could hurt your financial wellbeing. A fund house and its\nfund managers should always act as prudent asset managers and do whatever is in\nthe interest of investors. <\/p>\n\n\n\n

At a time when the industry is struggling to find safe havens amidst\nthe on-going debt crisis, accepting fresh investments indicates that the fund\nhouses are interested only in growing their AUM. <\/p>\n\n\n\n

They conveniently forget that a disregard for investors\u2019 interest\nmight cost distributors and advisors their reputation, as investors may lose\ntheir hard-earned money. <\/p>\n\n\n\n

It’s noteworthy that not all fund houses are making bad investment decisions. The ones following robust investment processes and systems are better off. They don’t compromise on qualitative aspects<\/a> such as corporate governance to accomplish their investment objectives and to stick their neck out.<\/p>\n\n\n\n

PersonalFN<\/a> considers various quantitative and qualitative parameters while recommending equity and debt mutual fund schemes<\/a> to its subscribers.<\/p>\n","protected":false},"excerpt":{"rendered":"

India\u2019s third-largest housing finance company, DHFL, is gasping for fresh life. On June 4, 2019, DHFL delayed the interest payment on its Rs 850-crore worth Commercial Paper (CP). Following this event, the independent rating agencies downgraded DHFL debt to Default (D). Within just 4 months, DHFL\u2019s credit rating has taken a serious knock from \u201cAAA\u201d…<\/p>\n","protected":false},"author":3,"featured_media":419,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"cybocfi_hide_featured_image":""},"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/417"}],"collection":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/comments?post=417"}],"version-history":[{"count":6,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/417\/revisions"}],"predecessor-version":[{"id":426,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/417\/revisions\/426"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media\/419"}],"wp:attachment":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media?parent=417"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/categories?post=417"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/tags?post=417"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}