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Defaulting ADAG Companies Could Hit Investors Hard!
May 7, 2019

Blame it on the dynamic business climate or call it the damage of mismanagement, some business houses are facing unprecedented challenges.

For instance, Anil Dhirubhai Ambani Group (ADAG) is grappling with unsustainable debt. It seems to have lost all its past glory. Recently it missed a debt repayment instalment in two group companies.

Predictably, independent credit rating agencies anticipated the default of ADAG companies; and they have slashed the credit ratings on Reliance Home Finance Limited (RHFL) and Reliance Commercial Finance Limited (RCFL) debt facilities.

What's at risk?

CARE Ratings slashed ratings of RCFL's long-term bank facility of Rs 12,700 crore from CARE BBB+ to CARE D. It also reduced ratings on RCFL's debt facility of Rs 5,000 from CARE BBB+ to CARE C.

Moreover, it placed RHFL's long-term debt facility of Rs 4,980 crore in the default category (CARE D). Earlier, it had assigned the rating of CARE BBB+. In another action, CARE reduced the rating on debt worth Rs 12,320 issued by RHFL from CARE BBB to CARE BBB+ and subsequently to CARE C.

If you focus on the estimation of financial damage it might have already caused or may cause to its debtors; you will realise the default is likely to show cascading effects.

The risk of immediate default looms over debt worth Rs 17,680 and the amount that may be potentially defaulted, if financials don't improve, is Rs 17,320.

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Exposure of capital market entities including mutual funds...

RHFL has Rs 7,708 crore of outstanding market borrowings on its book. Recently, this ADAG group company missed the principal payment worth 542 crore it owed to banks. According to a press release of the Company, RHFL had a net worth of Rs 1,744 crore as on March 31, 2018.

Another ADAG company, RCFL has an outstanding capital market borrowing of Rs 3,071 crore. This company also missed a principal repayment of Rs 477 crore, which it owed to banks.

However, the most crucial information piece in the press notes issued by these companies has been the group's silent admission that, the present management alone may not be able to take these companies out of mounting challenges.

RCFL/RHFL has commenced discussions with several potential strategic / PE partners for equity infusion into the business, accompanied with acquisition of complete management control.

Does securitisation of assets help?

Considering the recent Fixed Maturity Plan (FMP) fiasco, securitisation doesn't help either, if the underlying asset isn't liquid. Does that mean, RCFL and RHFL might default the capital market debt worth Rs 10,779 crore in future?

For now, lenders can only keep their fingers crossed.

How much exposure do mutual funds have to ADAG Companies?

According to ACE MF, overall thirty-seven mutual fund schemes from four mutual fund houses had an aggregate exposure of Rs 2,589 crore to RCFL and RHFL. Out of these, eighteen belong to Reliance Mutual Fund and they collectively had investments worth Rs 1,727 crore in RHFL and RCFL. With an exposure of Rs 785 crore, SBI Mutual Fund was the second largest creditor of RHFL from the mutual fund universe. Besides, UTI Mutual Fund and LIC Mutual Fund have invested investor's hard-earned money in troubled ADAG companies.

You would be shocked to know, in top 10 schemes with exposure to troubled ADAG companies, 9 are FMPs. Does that mean the FMP episode isn't going to end any time soon?

Table: Schemes with the highest exposure to troubled ADAG companies...
Scheme Name Holding % 1-Day return (Absolute %)
LIC MF Dual Adv FTP-2-Reg(G) 16.5 0.1
UTI FTIF-XXVII-IX(1160D) 9.7 -4.2
UTI FTIF-XXVII-VI(1113D) 9.5 -4
UTI FTIF-XXVIII-I(1230D) 9.4 -3.6
UTI FTIF-XXVIII-VII(1169D) 9.2 -3.5
UTI FTIF-XXVIII-II(1210D) 8.9 -3.4
SBI DAF-XVIII 8.4 -3.2
UTI FTIF-XXVIII-V(1190D) 8.4 -3.2
Reliance FHF-XXXII-10-1151D 8.3 -4.3
Reliance FHF-XXXII-7-1376D 8.2 -4.8
Portfolio data as on March 31, 2019
1-Day return reflects a change in NAV as on April 30, 2019
(Source ACE MF)

According to media reports, Reliance Capital has termed the ratings downgrade as unjustified and unwarranted. One may ask if making such claims isn't unjustified and unwarranted given the level of financial stress ADAG companies are currently in? Can ADAG companies deny the fact that their NAVs fell substantially when mutual funds marked-down their exposure to RHFL and RCFL?

If rating agencies don't take timely action, they might come under severe criticism someday if RHFL and RCFL default. Is it merely a coincidence that ADAG group promoted Reliance Nippon Mutual Fund is the top creditor of troubled companies from the mutual fund fraternity?

The fund house might not have flouted regulatory norms, but how ethical is it to invest in group companies which are struggling to secure adequate funding in the market?

It's almost deja vu like the DHFL case. If you remember, DHFL Pramerica Mutual Fund had the highest exposure amongst all mutual funds to DHFL.

Nothing seems to be going right for the investors of debt mutual funds. If you plan to invest in debt funds, stay with funds where the fund manager isn't chasing returns by taking higher credit risk. Needless to say, debt funds are risky investments. You should consider your risk appetite and time horizon before investing.

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Author: PersonalFN Content & Research Team

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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