Janalakshmi downgrades could weigh on debt MFs

MFs

Two back to back downgrades of Janalakshmi Financial Services' debentures is likely to weigh on the mutual fund industry. At the end of June 2017, over a dozen fund houses, across 60 different schemes, had exposure to the tune of Rs 1,400 crore to high-yielding debt papers of Janalakshmi, data provided by Value Research shows.

DSP BlackRock Mutual Fund, UTI Mutual Fund, HDFC Mutual Fund, Kotak Mutual Fund and DHFL Pramerica Mutual Fund are among the fund houses with highest exposure. Most of the debentures issued by Janalakshmi have coupon rates of as much as 13.5 per cent and maturity in 2018 and 2019.

In the first week of July, rating agency ICRA lowered its rating for Janalakshmi Financial Services' long-term loans and debentures from 'A+' to 'A', citing sharp deterioration in asset quality. On Wednesday, another rating agency CRISIL downgraded its ratings on the bank loan facilities and debt instruments to 'CRISIL A-/Negative/CRISIL A1' from 'CRISIL A/Negative/CRISIL A1+'. The agency said that the downgrade is on account of a prolonged weakness in Janalakshmi's collection performance which has led to a significant deterioration in asset quality, which could adversely impact its profitability.

"We are very hopeful that the perspective and outlook on Janalakshmi Financial Services will be very different in the next six months. Once the capital raise is completed, there should be significant improvement in its credit metrics. With improved liquidity in their balance sheet, Janalakshmi Financial Services may even look at reducing their high cost borrowings from debt markets," said Pankaj Sharma, CIO-fixed income, DSP Blackrock, which has exposure to the tune of Rs 345 crore.

Two of DSP BlackRock Mutual Fund's fixed maturity plans have 12.2 per cent and 8.79 per cent allocation to Janalakshmi's debentures. Three schemes of UTI Mutual Fund, India's sixth largest fund house, have allocation of between nine to -12.5 per cent of their total corpus. Likewise, some of the schemes from the stable of HDFC MF, Kotak MF, Indiabulls MF have between eight and 10 per cent exposure. The holdings are as on June 30, 2017 and it is likely there could have been changes to the portfolio. All the fund houses couldn't be reached for a comment immediately.

"We must mistake this is just a downgrade and not a default. We will continue to hold these papers till maturity," said a fund manager with exposure to Janalakshmi.

Fund managers said they are regularly in touch with the top management and promoters of Janalakshmi and the company has so far been transparent and forthcoming.

Founded by Ramesh Ramanathan, Janalakshmi is micro finance company with urban focus. The firm is also a small finance bank license holder.

In the recent past, Sebi has been asking fund houses to be careful with their debt investments amid spiraling of bad loans in the banking sector.