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Two more mutual fund houses, Franklin Templeton MF and Baroda MF, have decided to side-pocket their exposures to Yes Bank bonds following the rating downgrade of troubled private lender’s debt instruments.
This takes the total number of fund houses side-pocketing or segregating their exposures to Yes Bank bonds to five.
Three fund houses -- UTI MF, Nippon India MF and PGIM India MF -- on Friday announced to side-pocket or segregate their exposures to bonds of the private sector lender. The move is aimed at preventing the distressed assets from damaging the returns generated from more liquid and better-performing assets.
The development comes after the downgrade of debt instruments of Yes Bank to “D”, which is below investment grade, by rating agency Icra. Yes Bank on Thursday was put under a moratorium, with the RBI capping deposit withdrawals at Rs 50,000 per account for a month and superseding its board.
In a statement, Franklin Templeton MF, which had an exposure of Rs 294 crore to Yes Bank debt, has created segregated portfolios in four of its schemes. The four schemes are Franklin India Debt Hybrid Fund, Franklin India Dynamic Accrual Fund, Franklin India ShortTerm Income Plan and Franklin India Credit Risk Fund.
Pursuant to the downgrade of rating of debt instruments of Yes Bank to default category by Icra on March 6, Baroda MF, in a separate statement, said it has proposed to create a segregated portfolio in respect of its two schemes -- Baroda Treasury Advantage Fund and Baroda Credit Risk Fund -- of the private lender with effect from Friday, subject to approval from the board of directors of Baroda Trustee India Pvt Ltd.
Overall, mutual fund houses had an exposure to the tune of more than Rs 2,800 crore to Yes Bank bonds at January-end.
The RBI, in a notification, on Thursday said the financial position of Yes Bank has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits.
The bank has also experienced serious governance issues and practices in the recent years which have led to steady decline of the bank, it added. The central bank has appointed former CFO of public sector lender State Bank of India Prashant Kumar as an administrator.
In December 2018, regulator Sebi had permitted mutual funds to create segregated portfolios, or side-pocketing, with respect to debt and money market instruments. In case of a credit event that is a credit downgrade, like below investment grade and similar, segregated portfolio may be created.
Creation of segregated portfolios is a mechanism to separate distressed, illiquid and hard-to-value assets from other more liquid assets in a portfolio.
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