Sebi eases default valuation for MFs, allows valuers to make exceptions

Sebi
The Securities and Exchange Board of India (Sebi) has eased valuation norms for the mutual fund (MF) industry, allowing valuation agencies to make exceptions if there is a default by a corporate bond issuer because of the lockdown or the loan moratorium permitted by the Reserved Bank of India (RBI) leading to asset-liability mismatches.

According to market participants, the move will help stall mark-to-market impact on the portfolios of debt schemes because of the coronavirus-related lockdown and give relief on exposure to non-banking financial companies (NBFCs).  

“This will help reduce mark-to-market impact on portfolios to some extent at an initial stage, as valuation agencies can avoid considering default valuations for NBFCs affected by extending the moratorium to their borrowers,” said a fund manager.

However, experts say there can still be operational challenges. “The Sebi circular also says that MFs shall continue to be responsible for fair valuation. So, some MFs may still go ahead and write-off defaulting exposure, while others may take another approach. It will also be difficult for any MF to take a view that the default is purely on account of the lockdown or the moratorium, with overall economic growth under pressure,” said a senior executive of a fund house. “Further, there is no clarity on whether MFs can side-pocket such exposure if valuations are not pegged at stressed valuations. Lack of side-pocket can impact recovery for existing investors, allowing new investors to gain from recovery.” 

 

 
MFs can only side-pocket debt exposure if it is downgraded to below investment grade, which is BBB-minus. There is lack of clarity on whether rating agencies, which also act as valuation agencies, will downgrade defaulting bonds to below-investment grade in absence of stressed valuations.

 
NBFCs have come under pressure as banks are showing limited willingness to extend the moratorium to them, as well as are showing reservations in extending liquidity to NBFC debt papers through targeted loan term repo operations or TLTRO. On Thursday, the first tranche of RBI’s TLTRO only saw bids worth Rs 12,850 crore as against Rs 25,000 crore on offer.

“In view of the nationwide lockdown and a three-month moratorium/deferment on payment permitted by the RBI, a differentiation in treatment of default, on a case-to-case basis, needs to be made as to whether such default occurred solely due to the lockdown or the loan moratorium,” Sebi said in its circular.

 
The market regulator said if the delay in payment or extension of maturity is because of the RBI-permitted moratorium causing operational challenges in debt-servicing, valuation agencies may not consider the same as a default for the purpose of valuation.

The relaxations shall be in force, in-line with the moratorium, provided by the RBI.
Recently, debenture trustees on behalf of MFs and other bondholders had approached Sebi to seek relaxation on the valuation norms.

“Some fund houses were concerned that markdowns in debt portfolios would hit net asset values, causing panic among investors, and redemptions,” said another fund manager.



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