DHFL, a non-banking finance company focused on housing finance, has reportedly missed interest payments of ₹960 crore. It is not clear if the delay was to debt owed to mutual funds, however it has affected all debt issued by the company due to valuation norms that require funds to take write-downs on the occurrence of such an event. The missed payment follows multiple downgrades of DHFL’s debt. On 14th May, CARE Ratings downgraded DHFL borrowings worth a huge ₹1.13 trillion, just three days after rating agency CRISIL downgraded commercial papers issued by DHFL worth ₹850 crore on 11 May. Sources indicated that mutual funds have taken write-downs as per the valuations provided by independent valuation agencies. In this case of DHFL, the write down has been 75% of the value of assets. However if the instrument was unsecured, the write down is 100% of assets. DHFL has indicated that there is a 7 day grace period that allows the company to rectify the delay in payments.
Altogether, 165 schemes are exposed to DHFL (as of 30th April 2019) with a cumulative exposure of ₹5336 crore across 24 AMCs. 106 schemes have an exposure of more than 5% of assets making this a significant default for the vast majority of affected mutual funds. In terms of percentage exposure, DHFL Pramerica Medium Term Fund is the most exposed (37.42% of assets) followed by DHFL Pramerica Floating Rate Fund (31.94%), DHFL Pramerica Short Maturity Fund (30.47%), Tata Corporate Bond Fund (28.21%) and JM Equity Hybrid Fund (24.61%). The NAV drops in these funds are likely to be close to their exposures. For instance, Tata Corporate Bond Fund saw a 29.69% drop in NAV overnight.
In terms of absolute exposure in rupees, Reliance Low Duration Fund leads the pack, followed by UTI Short Term Income Fund and UTI Treasury Advantage Fund. They have exposures of ₹408 crore and ₹354 crore respectively. As a percentage of assets, even in these cases, the figure is high at 6.68%, 8.39% and 6.78% respectively. The data is of April 2019. In some cases the exposure may have gone up in May. For instance, UTI Treasury Advantage Fund recorded a 8.7% fall in NAV in excess of its April 2019 exposure to DHFL of 6.78% of assets (as on 30th April, 2019). On the other hand some AMCs may have reduced exposure but the chances of this are lower given the illiquidity of this paper. In any case, Funds with exposure are likely to see a drop in NAV proportionately. The AMCs that Mint reached out to said that side pocketing was an option on the table but no definite move towards it has been planned so far.
Amandeep Singh Chopra, Head (Fixed Income) at UTI Asset Management indicated that UTI MF’s exposure is secured and the write-down in their exposure is as per SEBI guidelines. The DHFL default is due to a delay in payment of interest, rather than an outright default.