Janalakshmi Financial downgrades may weigh on debt MFs

Two back-to-back downgrades of Janalakshmi Financial Services’ debentures are likely to weigh on the mutual fund industry. 

At the end of June, over a dozen fund houses through 60 schemes had exposure of Rs 1,400 crore to the high-yielding Janalakshmi debt paper, according to Value Research.

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

Rating agency ICRA in the first week of July lowered its rating of Janalakshmi’s long-term loans and debentures from 'A+' to 'A', citing sharp deterioration in asset quality.  

On Wednesday, CRISIL downgraded its ratings on Janalakshmi’s bank loan facilities and debt instruments to ‘CRISIL A-/Negative/CRISIL A1’ from ‘CRISIL A/Negative/CRISIL A1+’. The agency said the downgrade was on account of a prolonged weakness in Janalakshmi's collection performance, which had led to a significant deterioration in asset quality and could affect profitability.

Industry sources said Janalakshmi was raising equity capital to improve its financial situation. “We are hopeful the outlook on Janalakshmi Financial Services will be very different in the next six months. Once the capital raising is completed, there should be a significant improvement in its credit metrics. With improved liquidity, Janalakshmi Financial Services may even look at reducing its high-cost borrowings,” said Pankaj Sharma, chief investment officer, fixed income, DSP BlackRock Mutual Fund, which has an exposure of Rs 345 crore to Janalakshmi.

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 allocations of 9-12.5 per cent of their total corpus. Likewise, some schemes of HDFC Mutual Fund, Kotak Mutual Fund and Indiabulls Mutual Fund have between 8 and 10 per cent exposure. The holdings are on June 30, and it is likely there could have been changes to the portfolios. All the fund houses could not be reached for comments. 

"This is just a downgrade and not a default. We will continue to hold the paper until maturity,” said a fund manager with exposure to Janalakshmi.
Fund managers said they were in touch with the management and promoters of Janalakshmi and the company was transparent and forthcoming.

Founded by Ramesh Ramanathan, Janalakshmi is a microfinance company with an urban focus. The firm is also the holder of a licence for a small finance bank. 

The Securities and Exchange Board of India has been asking fund houses to be careful with debt investments as bad loans swell in the banking sector.

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