We have a zero default track record, and intend keeping it that way

Amit Tripathi

CIO – Fixed Income

Reliance Nippon Life AMC

  • Amit provides clear perspectives on a range of issues that have dogged debt funds recently including NBFC exposure and promoter funding transactions
  • Have debt funds now become toxic for retail investors? Amit sifts hype from facts to share his views
  • Reliance Nippon Life has a clean and long track record of no negative credit surprises, and will continue to work towards maintaining this track record, asserts Amit

WF: While regulatory intervention on NBFCs seems to have calmed some nerves, some experts believe that the problems are not really resolved. Market grapevine suggests that with fund houses reluctant to roll over their exposures to most NBFCs as their institutional investors do not like seeing NBFC names in their portfolios, access to credit remains a key challenge for NBFCs – which can cause upheavals in many of them in the coming weeks. What is the on-ground reality vis-à-vis NBFCs and how significant a risk do they continue to pose for mutual funds and for their debt fund investors?

Amit: MFs attitude towards NBFCs / HFCs has become very issuer-specific in recent times.

The first category is of large, retail focussed NBFCs / HFCs, with high degree of parent comfort and manageable leverage. In this category, investors behaviour is near normal, albeit in the overall context of flows in various categories of debt products. Since flow into non-liquid schemes has been neutral to negative, incremental lending by MFs to these entities has primarily happened at the shorter end.

Second category, the wholesale NBFCs, where larger questions on the quality and liquidity on the asset side are still being evaluated, considering the changed funding environment for end borrowers (RE companies, holding companies etc.). In such cases, funding is still available for strong parent-backed and low leveraged NBFCs albeit a bit restricted.

Third category is NBFCs / HFCs, where both leverage and asset quality questions coexist. In such cases, capital market access has been severely curtailed, and their primary source of liquidity generation for business and / or liability management has been through retail and wholesale loan sell downs.

While NBFCs / HFCs, given the overall low leverage at an aggregated industry level, along with the funding through retail loan sell downs, are likely to grind their way through the current environment, the second level impact may be on some highly leveraged end borrowers who may not find ready refinancing options.

Our base case for NBFCs / HFCS (barring the first category), hence, is slow growth, capital conservation, some name specific rating actions primarily driven by lower financial flexibility, but no big accidents like IL&FS.

WF: Promoter lending has become a big bug bear, and the risks have got amply highlighted in recent weeks with their shares nosediving on collateral sales. Some commentators are now questioning the wisdom of fund houses lending bond fund money to promoters. How would you react to this concern and how serious is the risk to debt fund investors from such lending?

Amit: In the context of the overall lending landscape, LAS transactions are primarily undertaken in those funds, which have a positioning mandate to take credit exposures. Hence, as a rule, LAS transactions would not be a feature of high grade open ended / close ended debt funds.

However, in the context of funds which have a mandate to carry various types of credit risk / structured exposures, LAS transactions are arguably a very reasonable exposure.

What the commentators confuse with is the standards maintained / diluted while undertaking LAS transactions and colour all LAS transactions with the weakest links. LAS transactions need to confirm to certain acceptable thresholds related to:

  • liquidity, market capitalisation of underlying companies with a reasonable operating profile.
  • Manageable leverage at the promoter level and financial flexibility of promoters.
  • Dynamic share cover of at least 1.5-2 times.

WF: The last few years saw significant NPA issues across the banking spectrum even as credit accidents seemed to be very sporadic within the mutual fund world. There is a concern that this “halo” is now gone, which can have significant implications on the way retail investors perceive the risk-reward equation of debt funds. How would you react to this perception of lasting damage to retail investor confidence?

Amit: With all the headlines, the fact remains that there has been only one actual default episode (ILFS & group companies) and one covenant relaxation case (Zee group) in the last 12 months, although in both cases, the amounts involved were meaningful. Rest all have been apprehensions regarding future performance of some exposures, but no case of any delays / defaults on any MF exposure. The other reason for these concerns is also the near complete breakdown in NBFC funding by debt capital markets for a few weeks in October post ILFS, which created a lot of apprehensions in the investor community. But there has not been any instance of an NBFC/ HFC not meeting its commitments.

Having said that, some of the issues raised have been around the robustness of various MF exposures to the cycles and vagaries of the markets and economy. That is where some belt tightening is called for specially in the fund management community.

Finally, as MFs participate in the growing debt capital market presence in India Inc. funding plans, the three most critical things that need to be steadfastly followed.

  • Stick to fund positioning when it comes to taking any duration or credit or liquidity risk.
  • No short cuts / substitute for detailed primary credit research and structuring expertise if a MF is operating in this space.
  • MFs manage money in a fiduciary capacity, and hence, there has to be a clear line on what are acceptable and non-acceptable risks, irrespective of the pay offs.

WF: How have your debt funds navigated through these multiple challenges around default and downgrade risks? Is the road ahead over the next 12 months likely to remain bumpy for debt funds or can we say with any degree of confidence that the worst is behind us?

Amit: At Reliance Nippon Life Asset Management, we have a clean and long track record of no-negative surprises in credit. We didn’t have exposure to ILFS or group companies. We have very limited exposure to ZEE group, but all covered only by listed Zee shares and all meeting their security cover requirements as on date.

We are in the business of predicting rating movements rather than following it. In a 17-member fixed income team, 10 people are dedicated to credit research. At the margin, we will always err on the side of caution because we manage money in a fiduciary capacity. While we will take risk in the right context, it will always be after detailed and thorough due diligence and adequate structuring to take care of our interests. Finally, we will stick to fund positioning, and take credit risks only in funds where we are mandated to do so.

WF: You have been a passionate champion of attracting genuinely long-term retail money into high quality debt funds, and your Nivesh Lakshya launch was a step in this direction. How is this fund performing?

Amit: Nivesh Lakshya uniquely fulfils a very important gap in financial planning for all individual investors. It addresses the long-term retirement and annuity goals through a pure debt, zero credit risk, highly tax efficient solution, with a very high degree of visibility of potential pay-outs, and is a must have in every investors portfolio.

While returns, since inception, have been best in class, given the portfolio of long term G-Secs in a declining rate environment, the focus should always be on long term compounding and tax efficiency, rather than short term gains or losses because of interest rate movements. Over a longer period, this product will always make returns more from compounding than from interest rate changes.

WF: Distributors are having a rough time trying to sooth the frayed nerves of some retail debt fund investors who are anxious about recent developments and their impact on returns from accrual funds. What would you like them to communicate to such investors?

Amit: At RNAM, we have and will continue to maintain the highest standards of credit due diligence, active management of all credit exposures, and strive to ensure that our clean track record in this category of funds is always maintained. Ultimately, the intent is not to give negative surprises to the investor in terms of potential vs realised returns over a reasonable holding period.

Investors who have invested across debt funds in RNAM can be rest assured that we will never go outside our mandate specially from a risk perspective and will continue to work with a zero-default approach across all funds including credit funds.

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