India Ratings and Research (Ind-Ra) downgraded Ballarpur Industries Limited's (BILT) Long-Term Issuer Rating to 'IND D' (default status) from 'IND BBB- 'on 22nd February.
A Press Release on Ind-Ra's website read: "The downgrade reflects delays in debt servicing by the company. BILT continues to face delays in the necessary deleveraging, as efforts to monetise its assets have not fructified within planned timelines. The company has also been unable to refinance its debt or elongate the maturity profile of its near-term debt obligations fully"
Just last month, ratings agency Fitch had downgraded the long-term issuer default ratings on BILT to a more speculative grade, citing its rapidly deteriorating liquidity situation and inadequate working capital as reasons.
As it turned out, four debt funds operated by fringe-player Taurus Mutual Fund had substantial holdings in BILT paper. Their NAV's took a severe drubbing, falling between 7 per cent and 12 per cent (absolute) in a single day because of the downgrade. Taurus Mutual Fund, despite being launched way back in 1993, has a miniscule AUM of roughly Rs 2340 crore; compared to Rs 2.27 lakh crores for India's top MF player, ICICI Prudential.
Surprisingly, two debt funds of the beleaguered AMC had an exposure exceeding 10 per cent in debt papers of BILT. SEBI rules stipulate a cap of 10 per cent on papers of a single issuer, unless explicit trustee approval is in place. More clarity will come through as "post mortem" facts emerge over the next few days.
For investors who view debt funds - especially liquid funds - as the proverbial 'safe haven' of investing, this came as a rude shock. This isn't the first time an AMC has gotten into trouble over defaulting papers - the Amtek-JP Morgan Saga of 2015 is well chronicled. JP Morgan AMC eventually sold its assets to Edelweiss Mutual Fund.
As an investor, are there any lessons you can learn from this fiasco? For starters, here are three:
Lesson 1: Before you invest into Debt Funds, understand the risks All debt funds carry unique risks. GILT funds are high in interest rate risks, while credit opportunities funds take on a deliberate default risk. It is a misnomer that debt funds are risk free - as an investor, it is imperative to understand them.
Lesson 2: Stick with the large players The larger the AMC, the more they have to lose in case they botch things up - both in terms of revenue, and face. They will also have much healthier cash flows, which they usually use to set up more robust risk control structures. Some large AMC's require each and every investment call to pass through an approval of a risk committee. Stick with AMC's that have large AUM's (such as ICICI Prudential, HDFC or Reliance). If you must invest in a fund by a smaller AMC, do so in one with a sound parentage (such as Motilal Oswal).
Lesson 3: Consult with a trustworthy Mutual Fund AdvisorDirect Plans may be all the rage now, but retail investors would be doing themselves a favor by consulting with an expert Advisor before making an investment. A conflict-free advisor can help you understand your individual risk profile, park your money in line with your ideal asset allocation, and help you choose best in class funds within each category. Most top Advisory firms employ robust product teams that continuously study MF portfolios and regularly engage with fund management teams at AMC's, in order to curate the best set of investment products at any point in time.
