NBFC Debt, Ma­tu­rity Pro­files Hit Cor­po­rate Credit Funds

Cri­sis in the NBFC space hit long-term ex­po­sure of the funds as per­pet­ual bond yields spiked

The Economic Times - - Money - Saikat.Das1 @times­group.com

Mum­bai: Cor­po­rate credit funds, once con­sid­ered safer sub­sti­tutes to high-yield­ing bonds, fared their worst in about four years as volatil­ity in NBFC debt and mis­aligned ma­tu­rity pro­files whit­tled down re­turns by 200-300 ba­sis points.

In the past one year, credit funds have yielded 5.22% com­pared with 8.50-9.50% in nor­mal cir­cum­stances, showed data from Value Re­search, an on­line mu­tual fund por­tal. “Wher­ever fund houses have taken a hit by sell­ing NBFC pa­pers in losses, their av­er­age re­turns have come down sig­nif­i­cantly," said Dhiren­dra Ku­mar, founder and CEO of Value Re­search. "In­vestors may con­tinue to shy away from credit funds un­less con­fi­dence is re­gained in NBFC debt se­cu­ri­ties." DSP Mu­tual Fund sold bonds of DHFL at a higher yield, trig­ger­ing spec­u­la­tion that there could be rat­ings down­grades in the hous­ing finance com­pany. In the se­condary mar­ket, DSP sold DHFL se­cu­ri­ties worth .₹ 300 crore at yields of 11%, about 200 ba­sis points higher than nor­mal rates.

Top per­form­ing funds, in­clud­ing Aditya Birla and Franklin, yielded 7.7-9.3%: The lag­gards, which in­cluded DSP and BoI AXA, yielded -0.11 to -2.5% an­nual neg­a­tive re­turns, data showed.

“Credit funds’ per­for­mance de­pends on the du­ra­tion play and mark-tomar­ket val­u­a­tions,” said A Bala­sub­ra­ma­nian, CEO, Aditya Birla Sun Life AMC. “There are no credit losses al­though. Credit funds should re­gain mo­men­tum this year with calm­ness com­ing back to the debt mar­ket.”

Typ­i­cally in credit funds, shorter ma­tu­rity pa­pers are the pre­ferred bets. Some of the fund houses took longterm ex­po­sures, bet­ting on the in­ter­est rate out­look. A sud­den cri­sis in the NBFC space sent such bets hay­wire, with per­pet­ual bond yields spik­ing.

Bond yields and prices move in op­po­site di­rec­tions.

Per­pet­ual bonds, per­ceived as riskier in­stru­ments, have no fixed ma­tu­rity. But they have mostly a pro­vi­sion to al­low in­vestors an exit af­ter 10 years.

“High net­worth in­di­vid­u­als nor­mally show in­ter­est in credit funds, but this is miss­ing now,” said Vikram Dalal, MD, Syn­ergee Cap­i­tal. “Over­load­ing of NBFC pa­pers may have dented re­turns as the mar­ket bat­tled a per­ceived cri­sis over the abil­ity of those com­pa­nies to re­pay.”

The dif­fer­en­tial be­tween the bench­mark bond yield and top-rated cor­po­rate bonds is­sued by pri­vate com­pa­nies is about 100-110 ba­sis points. The gap was about 70 ba­sis points early Septem­ber.

“Se­lect cor­po­rate bond spreads widened fur­ther af­ter the IL&FS de­fault and rat­ings do not re­ally mat­ter in those cases,” said Ajay Man­glu­nia, Ex­ec­u­tive Vice Pres­i­dent at Edel­weiss Finance. “Those in­vest­ing in these cor­po­rate bonds will be in­cur­ring markto-mar­ket losses that de­ter­mine fund re­turns.”

In the past year, credit funds have yielded

5.22% com­pared with a nor­mal 8.5-9.5%

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