4 min read.Updated: 27 Apr 2019, 10:06 PM ISTNeil Borate
Both CARE and ICRA have downgraded Reliance Commercial Finance and Reliance Home Finance
It is unclear how much debt held by mutual fund schemes has been individually affected by the downgrade
Within 10 days of the last set of downgrades on Reliance Capital, Reliance Commercial Finance and Reliance Home Finance, both CARE and ICRA have downgraded Reliance Commercial Finance and Reliance Home Finance. ICRA also downgraded commercial paper issued by Reliance Capital. All three Reliance ADAG Group companies have issued statements with regard to the downgrades with Reliance Capital stating that ICRA’s rating action is ‘unjustified and unwarranted and with an illusory review process.’
Seven AMCs are exposed to the three companies across 62 schemes. Two mutual funds which have exposure to the downgraded companies have also issued clarifications.
On 26 April, CARE Ratings downgraded long term bank facilities worth ₹12,700 crore issued by Reliance Commercial Finance from CARE BBB+ to Care D. The ratings agency also downgraded another ₹5,000 crore worth debt of Reliance Commercial Finance to CARE C from BBB+. 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." According to CARE Ratings, a rating of 'D' means instruments in this category are either in default or expected to soon be in default.
On the same day, CARE also downgraded long term debt worth ₹4,980 crore of Reliance Home Finance from CARE BBB+ to CARE D. It also downgraded debt worth ₹12,320 crore, earlier falling under either the CARE BBB+ or CARE BBB category to CARE C. Separately, on 26th April, ICRA downgraded Reliance Capital, Reliance Commercial Finance and Reliance Home Finance commercial paper from ICRA A2 to ICRA A4. In case of the former, short term bank lines were also downgraded from A2 to A4. Both continue to be on watch with negative implications.
Reliance Home Finance and Reliance Commercial Finance issued press releases stating that they have been affected by ‘a timing mismatch in regard to the ongoing further securitisation / monetisation proposals with banks, etc.’ Both press releases further added that, ‘for the past 7 months, ever since the IL&FS episode, all categories of lenders in India, including Banks, Mutual Funds, etc., have put an almost complete freeze on additional lending to Home Finance companies (HFCs) and Non-Banking Finance companies (NBFCs), and have instead only been insisting upon reduction of existing borrowings.’ Reliance Capital also issued a releasing stating that its short term debt is only ₹950 crore and it stands to be fully repaid before 30th September 2019 from stake sale in Reliance Nippon Asset Management (RNAM) presently valued at a market price of ₹5,300 crore. “ICRA’s rating action is limited to short term debt and is completely unjustified and unwarranted and was completed arbitrarily and with an illusory review process," it said.
An analysis of mutual fund data as of 31st March 2019 shows that 7 AMCs are exposed to the three companies across 62 schemes. The highest exposure is of Reliance Nippon Asset Management Company of ₹1,727 crores followed by SBI Mutual Fund at ₹787 crore. Reliance Nippon Asset Management in turn has Reliance Capital as its promoters raising important questions about MF holdings of promoter debt. Reliance Capital is reportedly in talks to divest its stake in Reliance Nippon AMC. On a scheme-wise level, the exposures range from as high as 16.54% of assets in LIC MF Dual Advantage Fixed Term Plan - Series 2 - Regular Plan to negligible amounts. The downgrades come at a troubling time for the mutual fund industry.
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." L&T Mutual Fund clarified that its exposure to Reliance Commercial Finance has not seen a change of rating. “CARE has downgraded Reliance Commercial Finance Ltd' standalone rating from BBB+ to C / D. We have nil exposure to any of these downgraded instruments. We have exposure in Reliance Commercial Finance Ltd's ₹40 cr of NCDs in 2 FMPs which are backed by a 100% Corporate Guarantee of Reliance Capital Ltd. Accordingly our NCDs continue to be rated at par with Reliance Capital Ltd and are currently rated at CARE A(SO)," the AMC said.
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