Mutual Funds

Rating downgrade of two ADAG companies’ bonds hits debt mutual funds

Dhuraivel Gunasekaran BL Research Bureau | Updated on May 03, 2019 Published on April 30, 2019

Revised ratings on bonds of RCommercial, RHome lead to dip in NAVs of Reliance, SBI, UTI

Debt fund investors received another blow this week. Long-term debt instruments of two Reliance ADAG companies — Reliance Commercial Finance (RCFL) and Reliance Home Finance (RHFL) — were downgraded by CARE rating agency from CARE BBB+ to ‘C’ and ‘D’.

Reliance, SBI and UTI asset management companies, that have exposure to these bonds will be hit as the downgrades will lead to lowering the NAVs of the schemes holding these bonds, thus impacting investors.

What happened?

On April 26, the rating agency CARE downgraded the ratings on Reliance Home Finance’s (RHFL) long-term debt programme (bank facilities) of ₹4,979 crore from BBB+ to D. Instruments with ‘D’ rating have defaulted or are expected to default soon. CARE also downgraded other debt instruments issued by RHFL including NCD (with detachable warrants worth ₹2,000 crore), long-term debt programme (₹5,020 crore), NCD public issue (₹3,000 crore) and NCD private issue (₹1,000 crore) from BBB+ to ‘C’.

Also, the debt instruments of Reliance Commercial Finance (RCFL) — long-term bank facilities worth ₹12,500 crore and NCDs worth ₹200 crore — were downgraded to CARE D from CARE BBB+. The other debt issues by RCFL, including NCDs worth ₹2,300 crore, market linked debentures of ₹200 crore, proposed NCDs and long-term debt programme were downgraded from BBB+ to ‘C’.

Data compiled from ACEMF shows that totally 36 schemes (of these, 26 are FMPs) from Reliance, SBI and UTI AMCs held exposure to these bonds worth ₹1,546 crore, ₹788 crore and ₹71 crore, respectively (as of March 2019). Around 90 per cent of these bonds mature in the next one year.


It is to be noted that one of the downgraded debt papers from the RCFL — ‘Reliance Commercial Finance SR-B 08 09.15%’ — held by Reliance Equity Hybrid Fund matured on April 19. The value of this holding was ₹200 crore. Though the bond matured before the rating downgrade announced by the CARE, the report released by the Reliance AMC on April 28 shows that the scheme continues to hold this security, at the pre-rating downgrade value. This could be due to delay in the repayment of the proceeds by RCFL. An email sent to the Reliance AMC, regarding this holding, received no response.

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