Rating announcements on Edelweiss, Shriram firms to add pressure on debt MFs

In a move that could lead to more pain for debt mutual funds, rating agency ICRA Ltd on Wednesday downgraded multiple Edelweiss Group companies, while earlier this week Shriram Group companies were put under "ratings watch negative" by IndiaRatings, which implies that there could be a possible downward rating action going ahead.

These ratings actions come at a time when debt mutual funds, especially the credit risk funds, have been witnessing redemption pressure following the shut down of six Franklin Templeton Mutual Fund debt schemes last month.

Edelweiss firms that were downgraded on Wednesday include Edelweiss Finance and Investments Ltd, Edelweiss Custodial Services Ltd, Edelweiss Retail Finance Ltd, Edelweiss Finvest Pvt Ltd, Edelweiss Housing Finance, Edelweiss Asset Reconstruction Company, Edelweiss Rural and Corporate Services Ltd and Edel Finance Company. The bulk of the downgrades were from a rating of AA- to A+. However CRISIL and CARE continue to rate several of these companies at AA-. On 30th April, CARE Ratings had revised its outlook on non-convertible debentures of Edelweiss Financial Services Ltd from stable to negative but maintained its rating of AA-.

Mutual funds have a collective exposure to these Edelweiss Group companies of around ₹3,300 crore as of 31st March, according to data from Pulse Labs, a mutual fund analytics provider.

According to data as of 31st March, mutual fund exposure is particularly high in Baroda Credit Risk Fund (11.25% of assets), Baroda Dynamic Bond Fund (9.15% of assets) and UTI Ultra Short Term Fund (8.49% of scheme assets) which have debt issued by Edelweiss Rural and Corporate Services Ltd. UTI Credit Risk Fund had a high exposure to Edelweiss Retail Finance (9.84% of scheme assets)

"The rating downgrade action takes into account the increased stress in the wholesale portfolio, leading to a deterioration in the asset quality, and the consequent impact on the financial performance,” ICRA said.

The Shriram group companies put on "ratings watch negative" by IndiaRatings include commercial vehicle financier Shriram Transport Finance, consumer loans provider Shriram City Union Finance and mortgage lender Shriram Housing Finance. The three companies currently have a rating of AA+, AA and AA respectively. To be sure, a ratings watch does not necessarily translate into a downgrade.

IndiaRatings cited limited visibility on the impact of the measures taken by authorities to stop Covid 19 pandemic on the companies in question.

"Micro, small and medium enterprises (MSME) and two wheeler loans could be among the asset classes that could face higher impact in light of their weaker customer profile,” said the ratings note.

According to Rupeevest, an online mutual fund platform, as of 31 March, mutual funds have an exposure of ₹6,111 crore to Shriram Transport Finance debt and an exposure of ₹3,689 crore to Shriram City Union Finance Debt.

Franklin India Short Term Income Plan and Franklin India Credit Risk Fund had the highest exposure in rupee terms to Shriram Transport Finance and both schemes have been frozen, pending the winding up process. In terms of percentage of assets, exposure in them was 11.64% and 10.79%, respectively.

"The commercial vehicle finance segment is facing a lot of headwinds. Even a downgrade without a default can cause mark-to-market losses. Investors could think of switching to corporate bond funds or liquid funds, depending on their time horizon. Corporate bond funds typically hold at least 80% of their corpus in AAA papers," said Kalpesh Ashar, founder, Full Circle Financial Planners and Advisors.