If there is any recovery in the future, the provision will be written back to the schemes on actual receipt basis
Leading fund house UTI Mutual Fund (UTI MF), backed by public sector institutions like SBI, PNB, and LIC, has increased the markdown to DHFL debt securities from 75% to 100% in the schemes which have an exposure to Dewan Housing Finance Ltd. (DHFL). The fund house, with investor accounts of over 1 crore spread across its 190 domestic schemes/plans, has also introduced an exit load in five debt schemes that had exposure to the housing finance firm’s debt securities.
UTI MF said on June 4, 2019, DHFL had interest and principal payments due to the tune of approximately Rs 1,100 crore to the industry/investors and the company failed to repay on the scheduled date. As per the standard haircut table for sub-investment grade debt securities which have been provided/finalised by valuation agencies (CRISIL and ICRA) and AMFI, UTI MF had taken a 75% markdown to DHFL debt securities in the schemes that have exposure to DHFL.
On its part, DHFL has maintained that there has been a delay in payment of interest on the NCDs issued by the company through public issue. “The company is taking all the necessary steps and shall ensure the payment of the due interest within the cure period of 7 days.”
Subsequently, on June 5, 2019, CRISIL, ICRA and CARE downgraded its rating on the Commercial Paper (CP) / Non – Convertible Debentures (NCD) of DHFL to ‘D’, based on delay in debt servicing due to inadequate liquidity, modest capital position and modest earnings. The rating revision takes into account the recent instance of delay in servicing of obligations with respect to some of the non-convertible debentures by DHFL due to prolonged liquidity stress. (Source: Press Release of CRISIL, ICRA, and CARE as on June 5, 2019).
Specifically, DHFL has Rs 850 crore of outstanding CPs of which Rs 750 crore is due in June 2019. The first Commercial Paper maturity was on June 7, 2019. With liquidity inadequate as on date to service debt and visibility very low on timely fundraising, CRISIL said it expects the Commercial Paper to be in default on maturity. When RupeeIQ reached out to DHFL on June 7 Commercial Paper maturity, a spokesperson did not immediately send a response.
UTI MF said it anticipates that there would be enhanced pressure and legal action on DHFL from all creditors, including the exercise of early redemption clause and legal options by various lenders. “This is expected to further delay the recovery efforts of the company in the disposal of its assets in an orderly manner. Furthermore, there is no secondary market for such securities in the current scenario,” the fund-house said.
Considering the high level of uncertainty as to recovery timelines and value, UTI MF said it has increased the markdown to DHFL debt securities from 75% to 100% in the schemes which have an exposure to DHFL. If there is any recovery in the future, the provision will be written back to the scheme(s) on actual receipt basis. This means the hit on NAV on June 4 (over June 3) and June 6 (over June 5) may get reversed partially or fully if UTI MF makes any recovery from DHFL.
Furthermore, in line with the above development and in order to safeguard the interests of the existing investors in these funds, UTI MF has introduced an exit load in the UTI Treasury Advantage Fund, UTI Ultra Short Term Fund, UTI Short Term Income Fund, UTI Dynamic Bond Fund and UTI Bond Fund effective from June 7, 2019.
Let us see how the revised exit loads stand now. Earlier, there was no exit load in 5 funds – UTI Ultra Short Term Fund, UTI Dynamic Bond Fund, UTI Bond Fund, UTI Treasury Advantage Fund, and UTI Short Term Income Fund. But now, any exit before three months in these five funds will attract 3% exit load. If you exit between 3 to 6 months, the load will be 2%. If you exit between 6 months and 1 year, the load will be 1%. Any exit after 1 year will attract no load.
As on April 30, 2019 (i.e. the last portfolio date), these schemes individually had between 1-8% exposure to DHFL debt securities. When the new portfolios will appear as on June 30, there should not be any DHFL exposure.
“The introduction of the exit load is on prospective basis (i.e. will be applicable only to investors who invest in these schemes from 7th June 2019 onwards and NOT TO EXISTING INVESTMENTS) and has been done to deter speculative action in the funds and to safeguard the interests of the existing investors,” UTI MF said.
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