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DHFL mess may trigger second wave of risk aversion in debt funds

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NEW DELHI: With DHFL group companies’ debt mess coming under 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 ILFS 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 8,500 crore as of December 2018, the brokerage said. The banking sector’s exposure to DHFL group was about 40bps, it said. Investigative media outlet Cobrapost last Tuesday alleged Dewan Housing Finance (DHFL) had given Rs 31,000 crore loans to ‘dubious’ entities linked to the promoters who, the news portal said, were the ultimate beneficiaries of the funds. DHFL Chairman Kapil Wadhawan countered the charges, claiming all the transactions were legitimate. Before the Chairman's words could bring any respite for the mortgage lender, DHFL once again came on investors’ radar after December quarter numbers showed acute pain from the September liquidity crisis in the NBFC space, leading to a 37 per cent drop in quarterly profit. The Ministry of Corporate Affairs said it has ordered a probe into the Cobrapost allegations. Several fund houses have large exposures to DHFL, at 2-10 per cent of total debt AUM, with some schemes having up to 30 per cent of their AUM to DHFL, Credit Suisse said. 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.

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. 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, the global brokerage said. Shares of DHFL closed at Rs 111.45, with a loss of 17.96 per cent, on BSE Friday.




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