An Ambani downgrade has everyone tense

MUMBAI: Mutual funds and non-banking finance companies (NBFCs) are getting the shivers over possible adverse investor reaction to sharp downgrades of Reliance Home Finance (RHFL) and Reliance Commercial Finance (RCFL) debt instruments stemming from the financial status of the indebted Anil Ambani-led Reliance Group.The market has been jittery since the shock default by Infrastructure Leasing & Financial Services (IL&FS) in September last year sparked a liquidity crisis that hit NBFCs. One of the ripple effects has been the inability of some mutual funds to make payments on time to fixed maturity plans subscribers after investing in unsecured corporate debt.Borrowing costs may rise and liquidity may shrink in the debt market with key investors such as mutual funds holding back on investments. Fund houses may also raise their cash position, expecting a surge in redemptions as in the aftermath of the default by IL&FS. “Whenever there is a default, lenders tighten norms of lending,” said Mahindra Finance managing director Ramesh Iyer.Rs 2,600-cr exposure in RHFL, RCFL“Two things will happen — first money becomes costly and second it may not be available for all. Lenders may characterise risks differently and some people might find it difficult to raise funds. NBFCs with good ALM (asset and liability) norms are able to borrow based on fresh disbursement needs,” he said. 69089468 The differential between triple-A NBFCs and non-triple A ones is now in the range of 60-100 basis points compared with 20-40 basis points before August last year, traders said. The gap may widen further by 20-30 basis points. One basis point is onehundredth of a percentage point.“There seems to be some pressure on rates and liquidity, which are already in deficit in the banking system,” said Aditya Birla Mutual Fund CEO A Balasubramanian. “Fund managers will be more judicious in subscribing to debt paper. The Reliance Group’s exposure to mutual funds is nothing fresh but was from the past before August last year.”The silver lining is the magnitude of investment will not be as large as that of IL&FS. Unlike IL&FS or Zee, fund managers have already factored in negative news flows amid lingering troubles for the Reliance Group, which includes Reliance Communications.Mutual funds are estimated to have over Rs 5,000 crore invested in eight Reliance Group companies, of which nearly Rs 2,600 crore is in RHFL and RCFL securities. Reliance Mutual Fund holds about twothirds of the two companies’ bonds, according to a market estimate.“Borrowing cost may go up in the short term highlighting weak players in the market,” said Value Research CEO Dhirendra Kumar. “The extinction of unfit is a natural course. Darwin’s theory (survival of the fittest) is finally at work in India.”RHFL and RCFL have delayed bank loan repayments.“If a sector is mired in default, lenders are not willing to lend to them,” said PNB Housing Finance managing director Sanjaya Gupta. “If there is a shortage of credit, it will lead to consolidation in financial initiations.”Care cut RHFL’s rating to D for default from BBB+ as the company failed to repay bank loans on time.“There has been rescheduling of repayment in one of the bonds issued by RCFL,” said Ravi Kumar, analyst at Care Ratings. “Other instruments downgraded have high risk of default given the weakening of the credit profile of the companies.”Care also downgraded an RCFL nonconvertible debenture (NCD) series worth Rs 200 crore to D from BBB+ on which there has been a mutually agreed deferment in repayments. Payments due on April19 have been deferred to September. Besides, the rating company has downgraded various NCDs/other credit facilities mostly to C (junk status) from BBB+.The two companies have been trying to sell good-quality loan portfolios with both raising nearly Rs 8,000 crore from such efforts in the past six months. They aim to raise about Rs 500 crore every month, said a company spokesperson.RCFL and RHFL expect to regularise all repayments shortly, they said in statements on Saturday.The companies “have been affected by a timing mismatch in regard to the ongoing further securitisation / monetisation proposals with banks, etc., and the same has resulted in minor delay on principal repayments,” Reliance Capital said.“NBFCs’ liquidity has been tight for the last six-seven months and people are risk averse due to elections,” said Karthik Srinivasan of ICRA. “People will continue be cautious.”Rating company ICRA also cut RHFL’s commercial paper programme to A4 from A2 earlier.

from Economic Times http://bit.ly/2V3Trle