UTI Mutual Fund has ₹2,700 crore written down due to defaults and downgrade (to D) in shaky debt funds space in the last one year. Its securities worth ₹800 crore, too, have a BBB rating. As of December 2019, UTI Credit Risk Fund had 17.55% of its corpus in paper issued by Vodafone Idea. Mint spoke to Amandeep Singh Chopra, group president and head, fixed income, to know what went wrong, and the changes made since then.
UTI Mutual Fund has suffered on account of exposure to multiple troubled groups, including IL&FS, DHFL, Reliance ADAG and Altico. Was adequate due diligence not done?
The problem began post IL&FS. While we did not have any exposure in IL&FS, the moratorium swept up our ring-fenced NHAI annuity special purpose vehicle—Jorabat Shillong Expressway Ltd—into its folds. In spite of all legal documentation, the seniority of our debt exposure and bankruptcy remote structure of this investment, we became affected. In the case of Reliance ADAG, our exposure was pre-paid from the proceeds of the company; so we did not suffer any impact.
In spite of having halved our exposure to DHFL, the subsequent negative news and rating downgrades prevented us from exiting as liquidity dried up. A lot of asset management companies (AMCs) had taken short-term commercial papers (CPs) and bonds, which peaked to ₹19,000 crore. Many of these matured before the default in June 2019. These AMCs were just lucky.
In all the cases, our investment process was rigorously followed and multiple referrals from other lenders and investors who have had long-term relationships with these companies was taken.
When the initial defaults happened, you didn’t have time to side-pocket. You just increased exit loads, which allows speculators to come in and take advantage of recovery in the fund at the cost of the original investors. Did this happen?
When the DHFL credit event took place, we had not enabled segregation of portfolio (side-pocketing). We had to wait for the enabling process, which was underway and takes 30-45 days, to be completed. So to prevent speculative investors, we brought in exit loads, cut back commissions to disincentivize sales and put in place a mechanism to reject any large-value subscriptions. The myth that was propagated that there is this huge pool of money that is just waiting to benefit from our provisioning and quick recovery is wrong. This has not happened. The assets under management of the affected funds have declined despite the fact that we have a 100% provision compared to 75% mandated by the Association of Mutual Funds in India. So the original investors have not been disadvantaged in any manner.
UTI MF still has risky holdings like Yes Bank and Vodafone Idea. What is your strategy?
The nature of credit risk funds is such that it involves taking risk. The exposures that are today being categorized as risky were not so when we invested. Vodafone Idea is owned and managed by a well-known multinational. The promoters have committed large amounts into the business, but pushing such a company to the brink by an adverse AGR (adjusted gross revenue) order? There is no such precedence in any credit risk modelling. Some of the biggest companies in India can’t pay ₹50,000 crore in three months. The company had successfully won its stand before the adverse ruling in the Supreme Court. Thankfully, the government has stepped in and only the review of the AGR order is pending. Given the uncertainty on timelines, we marked down the value of our investments on 17 January and are awaiting some relief from SC and the government before taking further action.
Yes Bank is also facing unique challenges. Exposures in large troubled groups has impaired its capital. While they’ve had one round of infusion, they need more capital to provide for all present and potential stresses in the wholesale loan portfolio, as well as some growth capital. We are hopeful that this will happen. There is a market for the bonds, but the question is, do I want to exit at this price? There is comfort in the history of Indian banking where no scheduled commercial bank has been allowed to fail.
What has UTI Mutual Fund changed in terms of processes after the defaults?
We’ve expanded our credit research team, tightened our models and expanded our stress tests, which relied more on financials rather than on refinance and group linkages. There will be a stronger focus on ALM (asset-liability mismatch). While we may have exposure to a ring-fenced company, a troubled promoter can affect our exposure. Earlier, we looked at whether backstops were sufficient, but they can’t be conditional now. This was the problem in Altico. We’ll also look at whether the entity has cash flows to repay. Listing of CPs will standardize disclosure reporting arms.
How is RBI’s Operation Twist affecting debt funds?
Operation Twist is duration positive for a trade. You can play this tactically and capture some of the upside at the long end. So, while we have added duration from a trading perspective post announcement, it is not a continuing strategy. However, the underlying fundamental factors have not improved. Until we have a fix on how much the fiscal slippage in the current and next financial year is, Operation Twist can only achieve so much. If we want a structural decline in interest rates, fiscal deficit and inflation has to be brought under reasonable levels. It’s unclear if this is happening.
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