Nifty Bank index fell 2.32 per cent on Thursday, its biggest single day fall since September 24, 2018, as no specific measures were announced in the central bank’s policy annoucement to provide immediate relief to the much-troubled NBFC sector, said analysts.
The market was disappointed that its expectation of a 50 bps cut in rates was met by the RBI with only a 25 bps cut to the repo rate on Thursday.
Banks funded over Rs 50,000 crore to DHFL. State Bank of India, which has about Rs 8,800 crore exposure to DHFL as on June 2018, fell 4.34 per cent to Rs 337. Bank of Baroda, with an exposure of Rs 4,490, declined 6.33 per cent to Rs 124.20.
CRISIL, ICRA, and CARE have downgraded DHFL’s credit rating to ‘D’ which is default rating. Jittery markets are facing a crisis of confidence with respect to the precariously perched NBFC including housing finance companies & fixed-income mutual fund sectors, said analysts.
How DHFL default grade hurts your mutual fund returns
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After debt-laden mortgage lender Dewan Housing Finance (DHFL) failed to pay on its bonds on Tuesday, net asset values (NAVs) of several debt funds — including those run by top MFs — crashed. On Wednesday, ratings agencies Crisil And ICRA downgraded commercial papers issued by the company. Here’s the lowdown on the latest troubles in the debt fund segment and what can investors do to safeguard their money...
After debt-laden mortgage lender Dewan Housing Finance (DHFL) failed to pay on its bonds on Tuesday, net asset values (NAVs) of several debt funds — including those run by top MFs — crashed. On Wed..
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When the bonds issued by one firm forms a large portion of the fund’s portfolio, a default in it leads to a crash in the NAV of its holding debt fund. This is because under Sebi rules, as soon as a company defaults, the bonds issued by it should be valued at 25% of its original value — that is, a 75% markdown. Over the next 15 days, rating agencies — Crisil and ICRA — are mandated to independently look into each bond issued by that company and give their opinion on the present value of those bonds that each fund manager is liable to accept.
When the bonds issued by one firm forms a large portion of the fund’s portfolio, a default in it leads to a crash in the NAV of its holding debt fund. This is because under Sebi rules, as soon as a c..
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For example, a fund has Rs 100 crore worth of bonds issued by a company X, which defaults on its payment. The day the company X defaults, those bonds worth Rs 100 crore will be valued at Rs 25 crore (under Sebi rules). Now, if this debt scheme’s total portfolio size was Rs 300 crore, the bonds of company X at Rs 100 crore formed 33% of its portfolio. With Rs 75 crore gone due to the downgrade, the scheme’s NAV will fall by 25% in a single day. So the larger the holding of a bond in default, the bigger would be the fall in NAV on the day after the default.
For example, a fund has Rs 100 crore worth of bonds issued by a company X, which defaults on its payment. The day the company X defaults, those bonds worth Rs 100 crore will be valued at Rs 25 crore ..
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After the revaluation by rating agencies as mandated by Sebi, in most cases, the value of bonds in default are seen to be much higher than just 25% of their original (after the markdown). So investors could reasonably expect some smart recovery in NAVs after rating agencies give their valuation opinion.
After the revaluation by rating agencies as mandated by Sebi, in most cases, the value of bonds in default are seen to be much higher than just 25% of their original (after the markdown). So investor..
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In case the company is backed by sound business or assets, usually NAVs recoup their losses within 15 days. But a sharp recovery in NAVs does not happen in case of companies with no or bad assets. Mutual fund managers, however, don’t invest in such companies in the first place.
In case the company is backed by sound business or assets, usually NAVs recoup their losses within 15 days. But a sharp recovery in NAVs does not happen in case of companies with no or bad assets. Mu..
“The markets reacted negatively today especially after the RBI policy announcement as markets were expecting a lot more – both on the front of a larger rate cut like 50bps or liquidity driven measures upfront and a roadmap for the NBFC crisis that is making headlines daily,” said Rohit Srivastava, fund manager-PMS, Sharekhan by BNP Paribas.
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“It leaves the market uncertain for the next one-and-a half months, and hopes were that some announcements would be made today. This led to selling pressure and profitbooking by those who were betting on some big news event after the election of a strong government,” he added.
“Inadequately forceful response to the IL&FS bankruptcy has already created fear psychosis among market participants which is getting compounded by an almost blas e regulator treatment towards other troubled groups like DHFL, Essel, ADAG etc,” said Ajay Bodke, CEO-PMS, Prabhudas Lilladher.
DHFL sneezes and debt funds catch the cold
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Mutual fund investors holding debt of Dewan Housing Finance Corporation (DHFL) suffered one of the worst single day losses ever after the troubled housing finance firm delayed interest payments. The net asset values (NAVs) of several debt schemes fell by 6-53 per cent on Tuesday, reflecting the marked-down value of their holdings in DHFL paper. Let’s delve a little deeper and see what led to this crash and where do the investors stand. Have a look.
Mutual fund investors holding debt of Dewan Housing Finance Corporation (DHFL) suffered one of the worst single day losses ever after the troubled housing finance firm delayed interest payments. The ..
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DHFL’s woes began in late September after DSP Mutual Fund sold a portion of the housing finance firm’s securities at a higher yield. The transaction, along with the fiasco involving Infrastructure Leasing & Financial Services, triggered worries that DHFL could be facing liquidity issues. The worries soon spread to other non-banking financial companies (NBFCs), especially housing finance firms.
DHFL’s woes began in late September after DSP Mutual Fund sold a portion of the housing finance firm’s securities at a higher yield. The transaction, along with the fiasco involving Infrastructure Le..
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DHFL Pramerica Medium Term Fund, with assets of Rs 35 crore, saw its NAV plunge 52.99 per cent. The fund has the highest holding of DHFL paper at 37.42 per cent. Another scheme, DHFL Pramerica Floating Rate Fund — with assets of Rs 13 crore — saw its NAV plummet 48.4 per cent, with one-year returns dipping to 44.2 per cent. Tata Corporate Bond, which has assets of Rs 184 crore, saw its NAV fall 29.7 per cent, with one-year return at a negative 30.16 per cent. As many as 10 debt schemes saw their NAVs erode by more than 10 per cent on Tuesday.
A loss of 53 per cent in NAV would mean an erosion of 5-6 years of scheme returns. Investors earn 8-9 per cent in a year in debt schemes.
DHFL Pramerica Medium Term Fund, with assets of Rs 35 crore, saw its NAV plunge 52.99 per cent. The fund has the highest holding of DHFL paper at 37.42 per cent. Another scheme, DHFL Pramerica Floati..
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About 22 mutual funds together owned DHFL paper worth Rs 5,236 crore across 163 debt schemes as on April 30, 2019, as per data from Value Research. UTI Mutual Fund and Reliance Nippon Asset Management are among the largest fund houses holding DHFL paper. In 10 schemes, the holding of DHFL paper has crossed the single-issuer exposure limit of 10 per cent mandated by the Securities and Exchange Board of India. Wealth managers believe existing investors should stay put for now in schemes with exposure to DHFL.
About 22 mutual funds together owned DHFL paper worth Rs 5,236 crore across 163 debt schemes as on April 30, 2019, as per data from Value Research. UTI Mutual Fund and Reliance Nippon Asset Managemen..
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Meanwhile, DHFL’s parent Wadhawan Global has been selling businesses in the past few months to meet debt obligations. It sold Aadhar Housing Finance to private equity firm Blackstone earlier this year, and Avanse Financial Services to Warburg Pincus. The financial services group is also looking to sell its stake in the life insurance joint venture with US-based Prudential Financial. According to the sourcesThe Reserve Bank of India is said to have approved the proposed selling of the DHFL group company
Meanwhile, DHFL’s parent Wadhawan Global has been selling businesses in the past few months to meet debt obligations. It sold Aadhar Housing Finance to private equity firm Blackstone earlier this yea..
