Three ADAG companies downgraded, Reliance Nippon AMC has highest debt exposure

On 18th April, CARE Ratings downgraded Reliance Capital debt worth ₹21,000 crore from CARE A+ to CARE A. On 19th April, Brickwork Ratings followed suit. It downgraded Reliance Capital debt worth ₹14,100 crore from from BWR AA to BWR A+. The company cited “deterioration in liquidity profile of the group due to challenges faced by Reliance Capital and its key lending subsidiaries, Reliance Commercial Finance Limited (RCFL) and Reliance Home Finance Limited (RHFL) to raise funds through traditional bank lines and debt market instruments.” Two other ADAG Group Companies, Reliance Home Finance and Reliance Commercial Finance were downgraded by Brickwork Ratings. For both these companies, Brickwork noted that “no clarity has been provided on quantum of loans to group companies and timely recoverability of funds is critical to ensure timely repayment of debt obligations.” Reliance Capital stock was down 12.18% on Monday and is down 65.26% for the year gone by.

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. Debt troubles emanating from IL&FS and Essel Group Debt have caught debt fund managers on the back foot. Recently Kotak AMC held back some part of it FMP units against expected repayments from the Essel Group rather than allowing investors to redeem all units. HDFC AMC rolled over its HDFC Fixed Maturity Plan—1,168 days—February 2016 (1) - Regular Plan which had exposure to Essel. It later released a noted announcing plans to offer investors the option to rollover or to redeem.

It is unclear how much of the mutual fund debt in the ADAG group is Loans against Securities. It has been reported that the promoters of the Reliance ADAG group have entered into a standstill agreement with lenders till 30th September 2019, similar to the agreement between the Essel Group and its lenders. Industry professionals indicated that the MF exposure to the three companies – Reliance Capital, Reliance Home Finance and Reliance Commercial Finance does not fall within the loan-against-shares category and hence no question of a standstill agreement arises. However whether the paper in question is backed by shares or other collateral, investors in these schemes face a high level of risk.

Corporate group debt in schemes of mutual funds owned by the group also presents an added element of uncertainty. “Mutual funds which are owned by corporate groups will end up owning debt from the parent up to permissible limits. If the parent company is in trouble, fund investors should see it as a warning signal and look at exposure to the parent in their schemes,” said Deepali Sen, fouder, Srujan Financial Advisors LLP.