Debt mutual funds ask for bank guarantees, equity shares as collateral
Debt mutual funds ask for bank guarantees, equity shares as collateral
Easy liquidity and a rising appetite for risk have made mutual fund (MF) managers take on larger bets in lower-rated corporate paper. They're asking for bank guarantees and equity shares as collateral.
In the past two to three months, sector officials said a pursuit of higher yields, brought on by expectation of improving corporate earnings, had seen a higher incidence of AA-rated and even A-rated papers in debt schemes.
The trend of asking for collateral had almost died, as appetite for lower rated paper was minimal with the earlier poor sentiment. There has been a revival following the improvement in economic outlook, according to sector officials Business Standard spoke with.
For listed companies, the trend is for MF schemes to take a cover of equity shares. For instance, in the form of preference shares, where the collateral is two to three times the funds raised, said managers. In case of a default, these will be liquidated in favour of the investors.
Another structure employed is in the form of a bank guarantee. This is used with both unlisted and listed entities. In the case of companies which have become non-performing assets (NPAs) for their lenders, fund managers said banks offer to act as guarantors for such firms and urge them to raise money from the markets.
"Broadly, sentiment in the market itself is positive. The chase for higher yields and a risk-on mood in the market has fewer people worried about defaults," said Killol Pandya, senior fund manager (debt), LIC Nomura MF.
"There is some amount of increase in investment in non-AAA rated papers, given the expectations of an economic turnaround and improvement in corporate earnings. Worsening of credit quality seems to have bottomed out," said R Sivakumar, head, fixed income and products, Axis MF.
It appears the exposure to such corporate bonds is higher in what is being called 'credit funds' by the sector. These are where the proportion of AAA-rated papers is lower as compared to AA-rated or even some A-rated papers. Most corporate bond and short-term bond funds would classify as a credit fund where the credit-risk ratio is higher, thereby resulting in higher returns from the scheme, they said.
"Credit funds are coming back into vogue. They had lost significance during the crisis period that started in 2008, when some people had taken credit-risk in bond papers of certain corporates which had later defaulted," said Dwijendra Srivastava, head, fixed income, Sundaram Mutual.
Fund house officials said risk-appetite among MF investors was on the rise but fund houses themselves were being cautious about such risk exposure.
"There are those funds which go in for lower-rated papers. In such cases, the portfolio maturity will be of a lower tenure, less than a year or just about a year. That way, these schemes can take advantage of higher returns but do not take on a lot of risk because of the shorter tenure," said Vidya Bala, head of research at Fundsindia.com, an online distributor of mutual funds.
COLLATERAL FOR LOW-RATED BONDS
The practice of asking collateral for investment in low-rated papers by MFs seen going up
Rise in risk appetite leads to higher incidence of low-rated papers in debt funds in the past three months
MFs asking for collateral for such papers in the form of bank guarantees and equity
AA-rated and A-rated corporate papers account for majority of corpus in some corporate bond funds
Such funds often have shorter tenures of one year or less
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Easy liquidity and a rising appetite for risk have made mutual fund (MF) managers take on larger bets in lower-rated corporate paper. They're asking for bank guarantees and equity shares as collateral.
In the past two to three months, sector officials said a pursuit of higher yields, brought on by expectation of improving corporate earnings, had seen a higher incidence of AA-rated and even A-rated papers in debt schemes.
The trend of asking for collateral had almost died, as appetite for lower rated paper was minimal with the earlier poor sentiment. There has been a revival following the improvement in economic outlook, according to sector officials Business Standard spoke with.
For listed companies, the trend is for MF schemes to take a cover of equity shares. For instance, in the form of preference shares, where the collateral is two to three times the funds raised, said managers. In case of a default, these will be liquidated in favour of the investors.
Another structure employed is in the form of a bank guarantee. This is used with both unlisted and listed entities. In the case of companies which have become non-performing assets (NPAs) for their lenders, fund managers said banks offer to act as guarantors for such firms and urge them to raise money from the markets.
"Broadly, sentiment in the market itself is positive. The chase for higher yields and a risk-on mood in the market has fewer people worried about defaults," said Killol Pandya, senior fund manager (debt), LIC Nomura MF.
"There is some amount of increase in investment in non-AAA rated papers, given the expectations of an economic turnaround and improvement in corporate earnings. Worsening of credit quality seems to have bottomed out," said R Sivakumar, head, fixed income and products, Axis MF.
It appears the exposure to such corporate bonds is higher in what is being called 'credit funds' by the sector. These are where the proportion of AAA-rated papers is lower as compared to AA-rated or even some A-rated papers. Most corporate bond and short-term bond funds would classify as a credit fund where the credit-risk ratio is higher, thereby resulting in higher returns from the scheme, they said.
"Credit funds are coming back into vogue. They had lost significance during the crisis period that started in 2008, when some people had taken credit-risk in bond papers of certain corporates which had later defaulted," said Dwijendra Srivastava, head, fixed income, Sundaram Mutual.
Fund house officials said risk-appetite among MF investors was on the rise but fund houses themselves were being cautious about such risk exposure.
"There are those funds which go in for lower-rated papers. In such cases, the portfolio maturity will be of a lower tenure, less than a year or just about a year. That way, these schemes can take advantage of higher returns but do not take on a lot of risk because of the shorter tenure," said Vidya Bala, head of research at Fundsindia.com, an online distributor of mutual funds.
COLLATERAL FOR LOW-RATED BONDS
The practice of asking collateral for investment in low-rated papers by MFs seen going up
Rise in risk appetite leads to higher incidence of low-rated papers in debt funds in the past three months
MFs asking for collateral for such papers in the form of bank guarantees and equity
AA-rated and A-rated corporate papers account for majority of corpus in some corporate bond funds
Such funds often have shorter tenures of one year or less
Sent from BlackBerry® on Airtel
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