Debt funds have high exposure to real estate firms, NBFCs

Debt funds have high exposure to real estate firms, NBFCs
Business Standard, February 11, 2009, Section II, Page 1

VANDANA Mumbai, 10 February

Debt mutual funds continue to have high exposures to realty and non-banking financial companies (NBFCs).

Sample this: LIC Mutual Fund’s Liquid Scheme has invested around 13.5 per cent (Rs 1,650 crore) of its portfolio in just two NBFCs — Reliance Capital and Indiabulls Financial Services.

ING Mutual Fund’s longterm fixed maturity scheme (FMP) 1 has 84.6 per cent of its portfolio in just one company — Unitech. Another of ING’s schemes, FMP series 53, has invested 100 per cent in the short-term debt of Reliance Capital, according to data from Value Research, a mutual fund tracking agency.

Others like Escorts Income Bond and Fortis FTP series 10 plan F have invested 56 per cent and 18.43 per cent respectively in Unitech. Even SBI Mutual Funds Short Horizon Liquid-Plus Fund has invested 3.72 per cent, or Rs 207.39 crore, in DLF.

Nikhil Johri, managing director, Fortis Mutual Fund, said, "We had communicated to investors at the time of the launch that though returns are much higher in these schemes, credit rating is lower. There were heavy redemptions during the September-October period in these schemes.” Recently, Crisil, in one of its reports titled, ‘Small debt funds face concentration risk’ said that a majority of schemes have single industry concentration and many small schemes have single company concentration. “Funds with large and illiquid single-company exposures could be affected by redemption pressure,” the Crisil report said.

The high exposures continued despite the overall concern over the last six to nine months that these sectors may be unable to service their loans because of tight liquidity conditions.

Unitech, Indias second largest real estate player, is overburdened with short-term loans and is struggling to repay its debts. At present, the total debt of the company is Rs 8,000 crore. Out of this, Rs 2,500 crore has to be repaid by March 31 and another Rs 2,500 crore later in the year. According to a fund manager, the total industry’s exposure to Unitech is Rs 2,500 crore.

Parijaat Agarwal, head (fixed income), SBI Mutual Fund, said, “We have not made any fresh investments. Since the assets under management have come down, the percentage of net assets has become higher." There could be a few reasons for the existing high exposure, one of them being inter-scheme transfers. That is, funds could have moved their exposure from say, a liquid fund to FMP or from an equity scheme to liquid fund.

Another explanation could be that because of redemption pressures, the exposures have gone up. In some cases, schemes would have attracted very little money to diversify.

What makes the scenario complicated is both DLF and Unitech’s debt has been downgraded by credit rating agency Fitch. And even, NBFCs are not being viewed too favourably.

Last October, there were redemptions to the tune of Rs 97,000 crore leading to a liquidity crisis in the industry. A lot of securities were either sold at a discount or transferred to other schemes to meet the redemption pressure. In some cases, promoters stepped in to purchase these papers.

OVER-DEPENDENCE

Scheme Company Exposure*
LIC MFliquid Reliance Capital 845.28
LICMF Liquid Indiabulls 805.23
SBI Short Horizon Liquid Plus Reliance Capital 213.08
SBI Short Horizon Liquid Plus DLF 207.39
Magnum InstaCash Reliance Capital 182.49
Fortis Money Plus Reg Indiabulls 158.88

*Exposure of schemes over 100 crore