Reliance ADAG companies face paper downgrades

The markets are yet to recover from the IL&FS episode and another crisis has popped up and this times its Reliance ADAG (Anil Dhirubhai Ambani Group) companies. Recently CARE and ICRA, downgraded the papers of two major companies of the group, viz. Reliance Home Finance Limited (RHFL) and Reliance Commercial Finance.

Credit rating D from CARE indicates default or that the company is expected to default soon. This downgrade from CARE is done due to delay in servicing bank debts. Though RHFL in its press release stated that they have been affected due to timing mismatch with regards to ongoing securitization or monetization proposal with banks. This has resulted in minor delay on principal repayments which is aggregated to Rs. 542 crore to around five to six banks and is limited only to their bank borrowings. RHFL expects to regularise payments very shortly. They have already completed securitisation of over Rs. 5,500 crore in debt papers from October 1, 2018 till date and are engaged in active discussions for further securitization or monetization of their asset base. The company has reassured investors that it is completely current and regular on principal repayments on all its capital market borrowings which aggregates to around Rs. 7,708 crore.

Post the downgrade in papers even Reliance Nippon Life AMC (Asset Management Company) issued a press release and stated that Reliance Mutual Funds has exposure of Rs. 535 crore and Rs. 1,083 crore to long-term NCDs (Non-Convertible Debentures) RCFL and RHFL, respectively. Around 10 per cent of Reliance Mutual Funds total 166 fixed income and hybrid schemes hold this exposure.

It is estimated that 10 fund houses hold over Rs. 5,000 crore in eight Reliance ADAG companies. From those Rs. 5,000 crore, approximately Rs. 2,600 crore are contributed by RHFL and RCFL securities. Reliance mutual fund alone holds Rs. 1,618 crore in these two companies’ securities.

From the above table, we can see that as on March 31, 2019 Reliance Nippon Life AMC had the highest exposure of Rs. 1,749.76 crore, followed by Franklin Templeton, SBI and UTI with exposure of Rs. 960.47 crore, 787.59 crore, 669.89 crore respectively in ADAG debt papers. It is to be noted that this is the overall debt exposure towards group so it also includes those debt papers which are status quo.

So, what should you do as an investor? Reliance Nippon Life AMC has taken a call to mark down the debt securities and soon others too will take their call. Earlier in September 2018, ICRA as well as CARE had downgraded the papers of IL&FS. As per the SEBI’s (Securities and Exchange Board of India) MTM norms, mutual funds had marked down the valuations of debt papers. At that time mutual funds holding IL&FS papers had to take around 20 to 25 per cent markdown on their holdings. Due to this, NAVs (Net Asset Value) of around 25 to 27 mutual fund schemes had got affected. So, if you are a conservative to moderate risk taker, then it would be better to move out of the funds exposed to debt papers of Reliance ADAG and invest in other funds that would suit your current requirements and also revisit your financial plan to know as to for which goals these funds were allocated to take further action. For aggressive investors, if they have made provision for all their needs and their ultimate goal is just wealth creation then they can hold on with such funds. However, consulting your financial planner, in any case, would be advisable.