IDBI downgrade leave MFs open to huge mark-to-market losses

MF companies found no buyers for the bonds even if they were trading at 18-19% discount.

DHFL Pramerica MF's exposure to the downgraded instruments was at Rs 6,47 crore.
Mumbai: Mutual fund companies such as UTI MF, HDFC MF, and 17 others are staring at at least 15% to 20% mark-to-market losses after the rating downgrade of IDBI Bank questioned its ability to repay despite the fact that it enjoys sovereign backing.

While MFs, with an exposure of Rs 7,400 crore, argue that the bonds will be ultimately paid when they mature and interest is also not a worry, they may have to sit on securities that few are ready to touch.

UTI MF has an exposure of Rs 2,746 crore while HDFC MF's exposure is at Rs 2,196 crore, data with rating companies show. DHFL Pramerica MF's ownership of IDBI Bank’s short term papers is at Rs. 50 crores which it expects to be nil by end of month. “We do not believe that the bank will default as the credit strength of the bank still lies in the majority government shareholding at ~75%,“ said Amandeep Chopra, group president, head-fixed income, UTI AMC. “In our view, GoI through its shareholding and due to the critical importance of the bank within the sector, has an obligation to support the bank and will continue to do so in order to maintain minimum regulatory capital requirement to Smart Investing meet interest payment obligations."

HDFC MF did not respond to ET's query. ``DHFL Pramerica Asset Managers Pvt. Ltd. would like to clarify that we do not have any exposure to bonds of IDBI Bank,’’ DHFL Pramerica MF said in a statement. ``Our exposure was only in short term certificate of deposits (CDs) of IDBI Bank. None of these have been downgraded.’’

Mutual fund companies, worried about the huge mark-to-market losses, found no buyers for the bonds even if they were trading at 18-19% discount. “Mutual funds are obligated to rate these bonds in their scheme at mark-to-market so they might have to a take a haircut on the NAV ,“ said Abhenav Khettry , MD, Vyana Wealth.“In my opinion, the government may not let IDBI default on the coupon, but obviously there's panic.“

Rating agency ICRABSE -0.49 % which had earlier downgraded the bank's rating in February, further downgraded its outstanding debt worth nearly Rs 26,000 crore, including its additional tier-1 (AT-1) bonds, citing weak capital position. On Thursday , its parent Moody's too downgraded IDBI Bank's rating, citing asset quality concerns and added that ratings are under review for further downgrade.

“We are looking at all avenues to improve our capital position and bring the bank on the recovery track,“ said MK Jain, MD, IDBI Bank. “We will look at aggressive recovery and cost cutting measures and plan to churn our corporate book and risk-weighted assets which should also ease the pressure on capital.“

The government has infused Rs 6,284 crore in IDBI in the five fiscals through 2016, and additional Rs 1,900 crore in March 2017. In April this year, state-run insurer LIC, the second largest shareholder in the bank, infused capital of `407 crore. But experts believe that despite the sovereign backing, IDBI Bank may default on interest payments due in August, October and January.

“As per the terms of the AT-1 instruments, the bank will be constrained on servicing the coupon on these bonds unless it reports profits and improves core equity capital above the regulatory levels by divestment of non-core assets or raising fresh capital before the coupon payment date,“ said Anil Gupta, VP , ICRA.

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