Regulator tightens liquid fund norms to mitigate risks

After an introduction of side-pocketing in mutual funds, the Regulator has now tightened norms for liquid funds following a series of credit episodes.

As the market regulator looks to protect mutual fund investors from IL&FS-like default risks, debt schemes widely used by companies to park short-term cash are expected to turn less lucrative.

A regulator has decided to introduce mark-to-market valuation for debt securities having a maturity of 30 days and more. Simply put, liquid funds may become more volatile going forward.

Investors who are willing to ride the fluctuations that can come into a portfolio can consider liquid funds holding securities with longer tenors. But they should choose only those that come with good credit quality and have strict monitoring in place so that unexpected credit situations can’t bring down the values sharply.

“The residual maturity limit for amortization-based valuation by mutual funds shall be reduced from existing 60 days to 30 days.

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Currently, rules say that fund houses have to do mark-to-market valuations of securities having a maturity of 60 days and more.

Debt market experts believe that fund managers will reduce average maturity on their portfolio to less than 30 days to avoid doing mark-to-market valuation. Hence, they would sell debt instruments having a maturity between 31 days and 60 days.

“Liquid funds have been holding debt instruments with less than 60-day residual maturity so that they don’t have to mark-to-market it which helps in reducing volatility in liquid funds. As per the new rule, the market to market (amortisation) limit has been reduced to 30 days which means liquid funds will have to do mark-to-market for debt having residual maturity between 31 and 60 days. To avoid this, liquid funds will want to move to papers with residual maturity of less than 30 days. This will lead to an increase in yield for papers with residual maturity between 31 and 60 days and fund turnover will increase. With stamp duty coming into the picture, we can expect a marginal decrease in liquid fund returns.”

The regulator further said that the difference between traded price and price quoted by rating agencies of security should not exceed 0.025%. This was reduced from 0.1%.

The regulator has asked AMFI to appoint valuation agencies to provide a valuation of money market and debt securities rated below investment grade. Currently, most fund houses rely on ratings by agencies to derive NAV.

However, AMCs can deviate from the valuation provided by agencies by giving a rationale for such deviations.

Check the factsheet regularly if you are invested in debt and balance funds

A quick scan of a liquid fund as on 27 February 2019 shows that 41% of the funds have portfolios with less than 30 days to maturity and, thus, the new directive will not have much impact on their current portfolios. Of the rest, many of the funds have durations not exceeding 35 days where the impact will be negligible. A few funds have portfolio duration of 50-70 days and they may see some volatility. “With the change in valuation norms, liquid funds would witness a marginal reduction in maturity profile, to enable stability in the returns profile. We do not expect significant changes to the return profile with a marginal reduction in maturity.”

Overnight funds have been finding flavour with investors parking money for very short terms. The horizon of investments along with the spreads between liquid funds and overnight funds will continue to remain the key determinant for investors’ choice in this category of funds.”

Among other key decision for mutual funds is allowing fund houses to come up with commodity mutual funds and PMS. In India, mutual fund houses were not permitted to invest in commodities other than gold. However, a few fund houses have thematic funds, which invest in companies engaged in the commodities business.

Commodity funds would be able to invest in a broader spectrum of agricultural, metal and mining commodities such as food crops, spices, fibres, copper, aluminium, oil, gold, silver and platinum.

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

9.1% to 9.35% L&T Finance NCD Review

L&T Finance Ltd is proposing to offer latest NCD issue. L&T Finance is going to offer Secured redeemable NCDs. The proposed public issue of L&T Finance Bonds will be open for subscription from 6th March 2019 to 20th March 2019.

L&T Finance Limited is part of the larger L&T Group which is one of the leading business conglomerates in India. L&T Finance Limited Company is one of the leading private non-banking financial services companies in India in terms of total loans outstanding, as of December 31, 2018. Its primary financing business segments are ruralwholesale and housing.

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What is a Debenture?

A long-term debt instrument issued by corporations or governments that are backed only by the integrity of the borrower, not by collateral. A debenture is unsecured and subordinate to secured debt. A debenture is unsecured in that there are no liens or pledges on specific assets.

What are NCDs?

Whenever a company wants to raise money from the public it issues a debt paper for a specified tenure where it pays a fixed interest on the investment. This paper is known as a debenture. Some of the debentures are termed as convertible debentures since they can be converted into equity share on maturity. A Non – Convertible debenture or NCD do not have the option of conversion into shares and on maturity, the principal amount along with accumulated interest is paid to the holder of the instrument.

There are two types of NCDs-secured and unsecured. A secured NCD is backed by the assets of the company and if it fails to pay the obligation, the investor holding the debenture can claim it through liquidation of these assets. Contrary to this there is no backing in unsecured NCDs if company defaults. However, any company seeking to raise money through NCD has to get its issue rated by agencies such as CRISIL, ICRA, CARE and Fitch Ratings. Higher ratings (e.g. CRISIL AAA or AA-Stable) means the issuer has the ability to service its debt on time and carries lower default risk. A lower rating signifies a higher credit risk.

Issue Details

Issue Date: Mar 6th 2019

Issue type: Fixed price issue NCD

Issue Size: Rs. 1500/- crore

Face value: Rs. 1000/- per NCD

Issue price: Rs. 1000/- per NCD

Market Lot: 1 NCD

Min. Quantity: 10 NCD

Issue Allocation Ratio: 30% of the Issue is for retail investors & 30% for HNIs (HNIs – individuals (applying for an amount of > Rs 10 lakh).

PUT & Call options: Put & Call options are not available.

Allotment of NCDs is on a first come, first serve basis.

Ratings: ICRA, CARE, IND has assigned AAA rating

Promoters: L & T Finance holding Ltd.

Offerings :

The company offers coupon rate ranging 8.75% to 9.35% depending on the tenures and the mode of interest payments which is either monthly or yearly

Objects of the issue:

For onward lending, financing, refinancing the existing indebtedness of L & T Finance Ltd. And General corporate purpose

Taxation:

TDS is not applicable on the listed debentures’ interest payouts (which are in Demat form). Else, TDS will be applicable if the interest exceeds the threshold limit of Rs.5,000/- in a financial year.

Interest earned on NCD bonds is taxable as per the tax slab of the investor.

If you sell NCDs on stock exchange before one year from the date of purchase, Short Term Capital Gains Tax is applicable. Tax rates depend on the tax slab you fall into.

If you sell NCDs on stock exchange before maturity but after one year, Long Term Capital Gains Tax (if any) at 20% with indexation & 10% without indexation is applicable.

Who can Apply?

This issue is open to all Indian residents, HUFs and Institutions.

Category I – Institutional Investors – 20% of the issue is reserved

Category II – Non-Institutional Investors, Corporates – 20% of the issue is reserved

Category III – High Networth Individuals (HNIs) – 30% of the issue is reserved

Category IV – Retail Individual Investors – 30% of the issue is reserved

Why you should invest?

 AAA Credit rating means very less likely hood of credit default

The NCD is secured, which means the above debt is backed by assets of the company

Part of the reputed conglomerate L&T Group

The interest rates are 2% higher than your regular Bank FDs

No TDS if invested in Demat For

Why should you not invest? 

There are NCDs available in the secondary market which have higher yields with a similar rating. The problem is low liquidity and hence is difficult to buy in large numbers.

The present Tax-Free Bonds are offering yields up to 6.5% in the secondary market, which is a better investment for People in the highest tax bracket.

 

Check the factsheet regularly if you are invested in debt and balance funds

Many mutual fund investors are worried about their investments in debt mutual funds as the interest rate and credit risk worries gather momentum, especially those practising DIY ( Do-It-Yourself ) investing.

“New investors are trying to enter the debt/balance segment and investors who manage their portfolios by themselves have started wondering how they can safeguard their debt/balance fund investments. “There are no rules to eliminate the risk, but investors can try to minimise risk.” 

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Know the categories well :

We believe that if you are a DIY ( Do-It-Yourself ) investor, the least you should do is keep a check on where your schemes are investing. Fund houses send a factsheet on your registered e-mail id every month. “You should see the changes in the factsheet. Which instruments have been added to the scheme and which have been dropped? Educate yourself if you are doing it yourself.”

Quality of the portfolio :

Higher-rated instruments have lower chances of defaults. Check if your scheme portfolio is betting on lower-rated securities to earn better returns. “The allocation changes and the ratings of the instruments added in the portfolio should be monitored. AAA-rated securities have a rare chance of defaulting. An IL&FS type default is very rare in the market.”

Duration of the instruments :

Another risk that you want to refrain from taking is the interest rate risk. When the interest rates go up, the longer duration bond funds are hit the most and vice-versa. Mutual fund investors who do not want to take calls on the interest rate movements can opt for dynamic bond funds. “Duration funds or bond funds are susceptible to interest rate changes. Investors who do not want to take such risk should bet on schemes that hold lower maturity papers like short and ultra-short duration funds.”

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

 

Provident funds investment in IL&FS bonds have no government guarantee: FinMin

The provident and pension fund trusts that invested in the IL&FS bonds now fear a loss of money as the debt-ridden company`s bonds are unsecured debt, and the Finance Ministry says superannuated bonds do not carry any government guarantee and all such instruments have to face all market-related risks.

“Since these are investments in bonds, the government does not ensure any guarantee on them as such and if these are invested in stock markets, they carry the market risks as applicable. It is between the bond issuer and bondholders…,” the Finance Ministry said in response to IANS queries.

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Thousands of crores of money of more than 15 lakh employees of both public and private sector companies have exposure to IL&FS bonds.

However, queries sent to the EPFO Commissioner and Labour Minister Santosh Gangwar remained unanswered.

Over 50 funds that manage retirement benefits of over 15 lakh employees have exposure to IL&FS. PF trusts of state electricity boards, public sector undertakings (PSUs) and banks are among them. The provident and pension fund trusts have filed intervening applications in the National Company Law Appellate Tribunal (NCLAT) stating that they stand to lose all the money since the bonds are under unsecured debt.

Usually, retirement funds have a low-risk appetite and invest in “AAA” rated bonds (which IL&FS bonds used to be once upon a time) and get assured returns with low-interest rates.

The worries of pension and provident fund trusts come from the classification of IL&FS profiling its companies as to which can meet the dues obligations. Many important trust managing funds of PSUs like MMTC, IOC, Hudco, SBI and IDBI are among those filing petitions. From the private sector, HUL and Asian Paints are among the petitioners.

IL&FS is currently under resolution process at the National Company Law Tribunal (NCLT). The process will decide under Section 53 of the IBC the order of priority for distribution of proceeds of the process.

The beleaguered company has informed the NCLT that of the 302 entities in the group, 169 are Indian companies, out of which only 22 are emerging as those which can meet all obligations (green), while 10 firms can pay to only secured creditors (Amber). There are 38 companies of IL&FS (red) which cannot meet any obligations of payment, and 120 entities are still being assessed.

These PF and provident funds trusts are worried that if payment is limited to secured creditors, then only financial creditors like banks will receive the dues while unsecured bond-holders will get any payments.

IL&FS bonds attracted investments by PF trusts as it had the shareholding of SBI and LIC giving its bonds the comfort factor.

( This story is auto-generated from a syndicated feed.)

Follow the 5 simple rules to select debt schemes

The recent credit downgrades have unnerved mutual fund investors.

Follow the 5 simple rules to select debt schemes

  1. Invest in a fund matching your credit & interest rate risk appetite. Always factor in the possibility of default.

Rethink if, – AAA bonds < 50%

Duration > 2

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2. Check how diversified is the debt portfolio. A 10,000 cr AUM is invested in just 20-30 bonds, or is spread across 50-80 bonds? This ensures basic safety through diversification. If there are fewer bonds, ensure they are all highest rated, else concentration increases risk.

3. Check the concentration risk of the portfolio especially in lower-rated bonds. High exposure in a single paper means, higher loss in case of default. A high % exposure, say 5-9%, in a very low rated paper, shows recklessness. Much more in multiple papers is indicates higher risk.

4. Check the levels of diversification across all the schemes of the mutual fund. That gives an idea of existence or otherwise of risk management across the fund house. That is a sign of a far greater sense of responsibility towards investors money, a sign of not being reckless.

5. While a fund, it’s fund manager & fund house selection is important, diversification across fund houses is VERY important. Even if a fund house conforms to your expectations today, there are no guarantees that it will continue to conform in the future.

 

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

Do your mutual funds have exposure to Essel Group?

Many investors are concerned about the impact the Essel Group fiasco will have on their mutual fund investments.

The Essel Group claims to have reached an understanding with lenders who hold pledged shares of the group’s promoters. This could arrest the decline in the Essel Group stocks. Group companies shares had plummeted 10-33% on Friday, triggered by reports of payment defaults and sale of pledged shares.

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While the sharp fall in stock prices dented the NAVs of equity funds holding these scrips, there were fears that the crisis would spread to debt funds as well. More than Rs 8,000 crore worth of bonds and debentures issued by group companies is held by 150 debt mutual funds. Of this, Rs 6,329 is invested in 60 open-ended debt funds while the balance Rs 1,672 crore is in 90 fixed maturity plans (FMPs).

In a statement issued after the meeting with lenders, the Essel Group stated that it has been agreed that the no default will be declared due to the steep fall in price and there will be synergy and co-operation amongst lenders.
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The Aditya Birla Sun Life Mutual Fund is the biggest investor, with an exposure of Rs 2,936 crore spread across 28 schemes. This is almost 37% of the total debt fund exposure to the Zee group. 

However, Aditya Birla Mutual fund is confident that the prices of these bonds and debentures will not be impacted. “These bonds are secure.” 

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One scheme alone has Rs 1,288 crore invested in Zee group bonds. As on 31 December 2018, the Aditya Birla Sun Life Medium Term Plan held zero-coupon bonds worth Rs 720 crore issued by Sprit Infrapower & Multiventures Pvt Ltd. (credit rating A) and Rs 568 issued by Adilink Infra & Multitrading Private Ltd (unrated). The two holdings account for 12.5% of the fund’s total Rs 10,272 crore portfolio and are its top holdings.

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Another scheme, the Aditya Birla Sun Life Credit Risk Fund, held Rs 740 crore worth of zero-coupon bonds of Sprit Infrapower & Multiventures Pvt Ltd. and Adilink Infra & Multitrading Private Ltd. The two holdings account for 9.2% of its portfolio, with Spirit Infrapower as its top holding (5.62%). The Aditya Birla Sun Life Dynamic Bond Fund has over 8% of its Rs 5,136 crore portfolio invested in Sprit Infrapower bonds.
In percentage terms, Baroda Mutual Fund schemes have the largest exposure to bonds issued by Zee group companies. As on 31 December 2018, the Baroda Credit Risk Fund had Rs 168 crore invested in zero-coupon bonds of ARM Infra & Utilities Pvt Ltd. and Cyquator Media Services Pvt. Ltd. Together, this is 17.7% of its Rs 947 crore portfolio.

The silver lining for debt fund investors is the new rule that allows side pocketing of distressed assets. It is an accounting method that separates illiquid bonds from quality investments in a debt portfolio. If the Zee group bonds crash, open-ended debt funds may cushion themselves by putting them aside in a separate side portfolio. The fund’s NAV then reflects the value of the liquid assets, with a separate NAV assigned to the side pocket assets based on their estimated value.

However, this will not apply to fixed maturity plans (FMPs) where the scheme has a limited tenure and bonds are held till maturity. HDFC Mutual Fund, the second largest investor in Zee group debt with an exposure of Rs 1,196 crore, has most of its exposure through FMPs. It has invested over Rs 900 crore in bonds and debentures through 38 FMPs. Some FMPS have over 20% of their assets invested in Zee group companies.

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

What happens to MF exposure to DHFL debt after downgrades by CARE

For mutual funds with exposure to DHFL debt, a rating downgrade means that there will be a mark to market impact on individual bond prices, also affecting NAV

After CARE cut ratings from “AAA” to “AA+” for debentures, loans and deposits. Rating for commercial paper (“A1+) has kept under watch with developing implications.

With DHFL group companies debt mess coming under the lens, global brokerage Credit Suisse has warned that it could trigger a second wave of risk aversion in India’s debt fund industry.

Earlier, India’s debt mart faced a major risk aversion during September-October following a debt default by the IL&FS group.

The DHFL debt mess is expected to have a resonating effect as the company is among the larger borrowers from mutual funds (MFs) and their aggregate exposure stood at around Rs 8,650 crore as of December 2018. That amounts to about 0.7 per cent of debt mutual funds asset under management as of December 2018.

DHFL ALLOCATION

About Rs.7,800 crore of such debt has been purchased by open-ended MF schemes, while the rest of the money is with closed-ended funds. Open-ended funds are where investors have the highest liquidity since you can come in or go out anytime. Closed-ended funds don’t allow you to exit before maturity.

Several fund houses have large exposures to DHFL, at 2-15 per cent of total debt AUM, with some schemes having up to 30 per cent of their AUM to DHFL

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UTI Mutual Fund had the maximum exposure of around Rs 2,144 crore as of December 31, 2018, followed by Reliance AMC at Rs 1,488 crore, Axis AMC at Rs 771 crore and Franklin Templeton Rs 571 crore.

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The DHFL issue may result into more scrutiny of credit risk in debt funds, and considering the fact that NBFC funding relies on MFs for 10-30 per cent of their borrowings, debt funds flow will see some hiccups in the coming days.

Some schemes have taken mark-to-market (MTM) losses on this exposure with DHFL paper being repriced at higher yields. Credit Suisse warned if this continues and leads to redemption pressure, it may cause a second wave of risk aversion in domestic debt funds and volatility in their flows.

In the open-ended space, about Rs 300 crore of exposure is to Aadhaar Housing Finance, which will now become the responsibility of Blackstone. DHFL is a Rs 6,200 crore of debt exposure for funds.

Debt raised by firms like DHFL is repaid within a few months (or years) as per maturity. If DHFL at some point is not able to honour its obligations, then that will be default like situation eg. IL&FS. However, such a situation may not really happen.

As a precautionary measure, some mutual funds may, however, write down the value of the bonds.

There is also the option to segregate or side-pocket bad assets so that the impact of the downgrade does not lead to panic redemptions. However, side pocketing can happen only in extreme cases, and that too when there is a default-like scenario.

Existing investors – For mutual funds with exposure to DHFL debt, a rating downgrade means that there will be a mark to market (MTM) impact on individual bond prices. This means there will be an impact on the Net Asset Value (NAV) of the funds.

In some cases, the MTM impact of the first series of downgrades on bond prices can be as significant as 25%. This means a 5% position for the bond in a fund would result in a negative 1.25% MTM performance attribution due to bond holding.

Any redemption from such funds at this point would result in an actual booking of losses.

Keep an eye on schemes with 10-33% exposure to single DHFL security.

Such examples are DHFL Pramerica Ultra Short Term (Dewan Housing Finance Corpn. Ltd. TR-1(30-Apr-19), JM Income (Dewan Housing Finance Corporation Ltd. SR-I CATG III & IV 09.10% (09-Sep-19)), JM Short Term Fund (Dewan Housing Finance Corporation Ltd. SR-I CATG III & IV 09.10% (09-Sep-19)), JM Low Duration (Dewan Housing Finance Corporation Ltd. SR-I CATG III & IV 09.10% (09-Sep-19)), Baroda Dynamic Bond (Dewan Housing Finance Corporation Ltd. SR-III CATG III & IV 09.25% (09-Sep-23)), DHFL Pramerica Medium Term (Dewan Housing Finance Corporation Ltd. SR-II CATG III & IV 9.15% (09-Sep-21)), DHFL Pramerica Floating Rate (Dewan Housing Finance Corporation Ltd. SR-I CATG I & II 09.05% (23-Sep-19)), DHFL Pramerica Low Duration (Dewan Housing Finance Corporation Ltd. SR-I CATG I & II 09.05% (23-Sep-19)), BNP Paribas Medium Term (Dewan Housing Finance Corporation Ltd. SR-I CAT I-IV 08.90% (04-Jun-21)), BOI AXA Short Term Income (Dewan Housing Finance Corporation Ltd. CATG I & II SR-IV 9.1% (16-Aug-19)), Tata Medium Term (Dewan Housing Finance Corporation Ltd. SR-I CAT I-IV 08.90% (04-Jun-21)).

 

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

 

Six mutual fund schemes under watch and downgraded one of these due to their exposures to the special purpose vehicles of IL&FS.

On Tuesday, rating agency Icra placed ratings of six mutual fund schemes under watch and downgraded one of these due to their exposures to the special purpose vehicles of IL&FS.  

A cash flow generating IL&FS SPV has chosen to default. Investors are now worried about more such defaults.

The schemes that were put under ratings watch are HDFC Short Term Debt Fund, HDFC Banking and PSU Debt Fund, UTI Banking and PSU Debt Fund, UTI Bond Fund, UTI Dynamic Bond Fund and Aditya Birla Sun Life Short Term Opportunities Fund. Icra also downgraded Birla Sun Life Short Term Opportunities Fund from AA+mfs to AAmfs.  

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UTI MF’s schemes have an exposure of about Rs 559 crore to the secured bonds issued by Jorabat Shillong Expressway (JSEL) as on January 21, 2019. According to debt fund managers, in a normal course, the interpretation is to keep the cash flows within the common pool until the situation settles down, but this interpretation is not applicable to the SPVs.

Fund managers say concern on repayments of IL&FS SPVs stems from another ‘ring-fenced’ SPV of IL&FS Group — Jharkhand Road Projects Implementation (JRPICL) — not paying coupon payments to its bondholders due on January 21. The NCLAT moratorium order on IL&FS and its group entities dated October 15 was cited as a reason for the non-payment.

Among the three fund houses under ratings watch, UTI MF has the largest exposure (as a percentage of its schemes) to IL&FS SPV.

According to Icra note, UTI Banking and PSU Debt Fund, UTI Bond Fund and UTI Dynamic Bond Fund’s exposure to JSEL stood at 6.87 per cent, 5.98 per cent and 6.25 per cent of their respective asset under management (AUM) as on December 31, 2018.

The fund house will value its investments in JSEL at a price based on the fair value principle in the light of recent developments and downgrades of similar structures. The fund house re-iterated JSEL’s capability to service its own debt.

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Meanwhile, HDFC MF has decided to take a 25 per cent markdown on its exposures to Hazaribagh Ranchi Expressway (HREL) considering the high likelihood of rating downgrade of HREL to below investment grade.

The exposure of HDFC Short Term Debt Fund to HREL is at 0.55 per cent of its AUM, while HDFC Banking and PSU Debt Fund’s exposure is 0.29 per cent of its AUM to HREL, according to the Icra note.

Birla Sun Life’s Short-Term Opportunities Fund’s exposure to JRPICL is at 1.15 per cent of the scheme’s AUM.

What I have understood

ILFS SPV – Curious case of default: What I’ve understood – given in this thread, The strange case of Jharkhand Road Projects Implementation Co Ltd an SPV of ILFS having cash and yet not paying creditors. The co. receives annuity every quarter from the Jharkhand Govt for roads built.

Rs. 75 crores of int and principal payment were due on 21.1.19. AND NOT PAID. There are currently Rs 450 crores lying in an escrow account out of which the payment was to be made. Usually, for financing such projects, an extra amt is kept in a DSRA account.

This DSRA is a debt servicing account to service debt if the annuity is delayed. With all this, yet the JRPIC chose not to pay Rs75 crores (remember 450 crores is ready to cash lying in the bank/liquid funds).

The annuity payments by the Govt of Jharkhand go to pay maintenance cost of the roads and principal and interest to creditors. What is left goes to the promoters after paying creditors. The revenue stream Is constant. The Jharkhand Govt has been paying regularly.

The company defaulted because of interpretation of an NCLAT order on ILFS and its companies by the current management. The NCLAT order put a moratorium on debt payments of companies and enforcement of assets by creditors.

The moratorium of NCLAT probably meant that creditors could not sell the security for loans of the ILFS companies and not meant to stop debt servicing of these SPVs which were receiving annuities regularly and servicing debt.

Now the management has taken a call that this applies to regular debt even from companies, SPVs that are servicing debt. So the creditors who could easily withdraw from the escrow account now cannot do so.

So curious case the State Govt is paying annuities regularly, there is money lying in the escrow account and the creditors have not received payment. Jharkhand Road Projects Implementation Company Ltd. is one of the SPVs within the IL&FS Group.

More pain seen in NBFC sector in next few months

The 50 largest NBFCs are looking for Rs. 700 billion in just the current month. The sector needs Rs 1.2 trillion in the current quarter and will have to refinance 40 percent of its debt over the next 12 months.

In India, crises move slowly. We’ve known for years that the state-controlled banks that dominate the financial sector were groaning under the weight of bad loans. For years, though, the government successfully kicked the can down the road. All those assets haven’t been accounted for yet, the banks haven’t been fully recapitalized, the bankruptcy process isn’t working to schedule, yet somehow the banks are still chugging along.

Frustrated entrepreneur sleeping on the table with a bomb of financial crisis on his head. Concept of bankruptcy and financial crisis

India’s luck may be about to run out. The country’s shadow banking sector — dominated by what officials call “non-banking financial corporations” or NBFCs faces something of reckoning over the next month. Ever since a leading NBFC  Infrastructure Leasing & Financial Services Ltd., or IL&FS defaulted on some of its debt recently, the entire sector has been starved of funds. The amount shadow banks managed to raise through the sale of commercial paper short-term debt fell by 65 percent in October, according to Edelweiss.

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cp paper 2IL&FS ran into trouble because it was borrowing short to lend long. Given that such behavior is common throughout the sector, everyone is worried about whether shadow banks will be able to roll over their debt. The 50 largest NBFCs are looking for Rs. 700 billion in just the current month. The sector needs Rs 1.2 trillion in the current quarter and will have to refinance 40 percent of its debt over the next 12 months.

principle ultraSome of the bigger shadow banking players, particularly in housing finance, might find that the liabilities due to be paid are higher than their assets maturing over the same period. The sector is in dangerous territory.

For India and its government, this poses a real problem one that will get worse if a few big NBFCs collapse because there’s insufficient liquidity in the market. While shadow banks account for at most 15 percent of lending in India, they seemed like safe and attractive destinations for the savings of the middle-class. They’ve also become central to infrastructure finance over the past few years. If a lack of funds slows down the real estate and infrastructure sectors and thus construction blue-collar jobs, too, would be lost. This isn’t the sort of thing any government wants just months before an election.

BOI AXAThat’s why all sorts of bailout schemes are being planned. Some of them might be worth trying. Most, though, look like bad ideas.

For instance, India’s largest bank, the State Bank of India, has promised to buy Rs. 450 billion of shadow-banking assets and banks have been allowed to lend more to NBFCs. There’s nothing inherently wrong with a bank buying distressed assets, as long as we can be sure it’s being done in the bank’s best interests and not because bureaucrats in New Delhi think that state-run banks’ money is theirs to command. If people fear that banks aren’t being sufficiently discriminating when buying NBFC assets, they’d have even more reason to worry about the asset quality of those banks. In other words, bailouts could spread contagion, not contain it.

What’s more problematic, perhaps, is the government’s insistence that the Reserve Bank of India opens up a special window to lend money to the sector as it has for banks. Think of this as being something like what the Federal Reserve did during the 2008 crisis when it expanded its historic role and chose to become a lender of last resort even to shadow banks.

dsp creditThe RBI is resisting; it doesn’t think there’s a systemic risk here. It also thinks it can do better than the central banks of the West did in 2008. While the latter may have prevented a crisis, finance got off too easy. The RBI seems convinced that India’s shadow banks need to clean up their act and they won’t if they get access to easy money now. If a firm or three end up going under, so be it. That would be better than using public money to create a dozen more failures such as IL&FS over the next few years.

This is a genuinely brave and praiseworthy stand. One of the great wonders of Indian economic history is that so few firms are allowed to fail in an economy that constantly under-performs expectations. That’s one reason few sectors manage to rise above mediocrity: The market is never really allowed to work.

This crisis may be an opportunity to change that mindset. India needs a vibrant shadow banking sector; there are some things that regular banks just can’t or won’t do. But the country won’t get one by coddling institutions that are borrowing at the wrong tenures and lending to the wrong sectors.

By Bloomberg

The biggest worry for global financial markets is China

China is the 2nd largest economy in the whole world and carries substantial economic hit with its trading partners. However, the slight fall in China’s equity market on 23rd November 2017 has set a fret in financial markets of China.

China Blue-chip stock index, CSI 300 had experienced its worst downfall in 17 months on 23rd of November. CSI 300 index fell by 2.93% as the market became worried about rising bond yields and PBoC deleveraging campaign.

CHINA

The current year, China’s bond yields have risen by 93 bps and are trading at 3-year highs. The sharp rise in China bond yields specifies the government’s determination to control corporate debt, which involves them in a talk that Chinese economy could fall in the coming future.

                                                        China CSI 300 Index

CSIThe top stock on Hang Seng was WH Group Ltd which stood up 1.69% and the stock which suffered loss was AAC Technologies Holdings Inc which sustained a downfall of 4.24%.

The 3 biggest H-shares percentage decliners were China Pacific Insurance Group Corporation Ltd which had a downfall of 4.73%, New China Life Insurance Corporation Ltd which has 4.7% and China Merchants Bank Corporation Ltd down by 4.1% while the biggest stocks which perform well were China Minsheng Banking Corporation Ltd which stood up 2.41%, Great Wall Motor Corporation Ltd which gained 0.98% and China railway Construction Corporation Ltd who stood up 0.77% in the Chinese financial market.

                                                China 10 Years Bond Yields

BONDSThe CSI 300 index is moving smoothly by 3.3% and closed down at 3% which is its biggest loss since June 2016 i.e., within 17 months. The ChiNext Index stood down by 3.2% which is its highest downfall in 4 months. The other two stocks, i.e., Shanghai Composite Index and Shenzhen Composite Index fell more than 2% that day.

Three finance lessons for your child

According to the report, China’s five years corporate bond yields had risen by 33 bps in November 2017, which has hit a three year high of 5.3%. In China, there is more than 1 trillion dollar of local bonds which are going to get matured in the coming year 2018-2019, therefore, it is going to be expensive for these firms to roll over financing.