On 30th December 2019, CARE Ratings downgraded Yes Bank debt across various categories by one notch. This included Infrastructure Bonds, Lower Tier II Bonds, Tier II Bonds, Additional Tier 1 Bonds, Upper Tier II Bonds and Perpetual Bonds.
The ratings agency cited delay in raising core equity capital which weakens the bank’s ability to absorb losses on account of higher provisioning due to weakening asset quality. According to data from Rupeevest as of November 30th, Mutual Funds have an exposure of ₹2,932 crore to Yes Bank. Much of this exposure is to highly risky Additional Tier 1 bonds which have been downgraded by CARE from BBB+ to BBB. Any downgrade below BBB would force mutual funds to start writing down their holdings according to the matrix specified by the Association of Mutual Funds of India (AMFI).
AT1 Bonds are designed to absorb losses in case the bank’s Common Equity Tier I Capital Ratio (CET 1 Ratio) falls below 5.5%. The bank can also skip coupon payments on the bonds in case of such an event or in some cases, convert them to equity. As a percentage of assets, Baroda Treasury Advantage Fund has an exposure of 23.49% of AUM to Yes Bank bonds, followed by Nippon India Strategic Debt Fund (17.43%) and IDBI Credit Risk Fund (12.22%). In absolute numbers, exposure is highest in Nippon India Equity Hybrid Fund at ₹653 crores (7.45% of AUM) followed by Nippon India Credit Risk Fund at ₹552 crores (9.85% of AUM) and Nippon India Strategic Debt Fund at ₹446 crore (23.49% of AUM).
“Mutual Funds are likely to side pocket the exposure to Yes Bank if it falls below BBB. However in such cases of side pocketing there have been recoveries from some borrowers in the past and in other cases recoveries are expected. Among these I would name Altico and some IL&FS Group Companies,” said Amol Joshi of Plan Rupee Investment Services. Side pocketing is a procedure under which a mutual fund can separate out a portion of its portfolio in lieu of bad debt. It allows investors to continue buying and selling units of the remaning (non-impacted) portion of the fund. Investors in the side pocketed portion are paid out when there is recovery in the bad debt in question.
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