DHFL Pramerica Asset Managers Pvt. Ltd. on Wednesday announced the merger of two open ended schemes which had heavy exposure to risky debt with two of its larger debt schemes.
DHFL Pramerica Floating Rate Fund (AUM: ₹13 crore) will be merged into DHFL Pramerica Ultra Short Term Fund (AUM of₹113 crore). DHFL Floating Rate Fund has only 1 holding (as of April 30th), a security issued by parent DHFL accounting for a 31.94% of assets. The rest of the scheme consists of ‘net receivables.’ DHFL Pramerica Ultra Short Term Fund has 3 holdings with no exposure to DHFL. However one of its holdings – Business Broadcast News Holdings 2020 occupies a 41.81% share in the portfolio. The second merger is of DHFL Pramerica Medium Term Fund (AUM: 35 crore) which has a 37.42% exposure to DHFL and DHFL Pramerica Credit Risk Fund (AUM: ₹796 crore) which has a 4.06% exposure to DHFL. The merger is slated to go into effect after 22nd June 2019.
In accordance with SEBI rules, investors have been given an exit-load free window to leave these schemes from 24th May to 22nd June 2019. “The merger is good for investors of the two small schemes in question but not for investors of the larger schemes which have less exposure to risky debt,” said Amol Joshi, founder, Plan Rupee Investment Services. Deepali Sen, founder, Srujan Financial Advisors added that a merger can push investors into schemes that are radically different from the ones they originally signed up for.
Alongside the mergers, the fund house introduced Side Pocketing into two of its fixed maturity plans DHFL Pramerica Fixed Duration Fund Series AH (AUM: ₹112 crore) and DHFL Pramerica Fixed Duration Fund Series AP (AUM: ₹110 crore). Side pocketing is a provision introduced by SEBI which allows a portion of a scheme to be segregated to account for bad debt. The units against this segregated portion can be redeemed when recovery is made against bad debt while other units can be redeemed at any time.
A senior executive at the fund house who did not wish to be named indicated that the side pocketing in these two FMPs was merely for ease of communication since the FMPs have few investors. He added that the AMC plans to introduce side pocketing across all schemes along other changes in fundamental attributes. This is likely to be done alongside the change in sponsor for the fund house. The source indicated a definitive agreement for the sale of DHFL’s stake to PGIM Inc, its joint venture partner has been signed in December and should be finalised shortly, after SEBI approval for the same is received.
DHFL, one of India’s largest housing finance companies, has undergone successive downgrades by credit ratings agencies. The last major downgrade of DHFL by CARE Ratings on 14th May marked down borrowings worth ₹1.13 trillion including long-term bank facilities, a fixed deposit programme, perpetual debt, subordinated debt and non-convertible debentures (NCDs). On 21st May, DHFL sent an email to distributors announcing a halt on accepting fresh public deposits and renewal of maturing deposits. It also stopped premature termination of existing deposits except for health or financial emergencies. Several schemes of DHFL Pramerica Mutual Fund including the ones being merged are highly exposed to DHFL.
DHFL has been downgraded a lot of times but it has not yet defaulted. It is also in talks to sell its stake in DHFL Pramerica AMC to PGIM Inc. That said, the first of the two mergers (between the Floating Rate and Ultra Short Term Fund) doesn’t seem to do much for investors. It combines a highly risky scheme with another relatively risky scheme and is no long term solution. The latter merger seems more beneficial. It merges the highly exposed DHFL Medium Term Fund into its much larger Credit Risk peer. However in both cases, the mergers are short term sticking plasters at best. Over the long term, DHFL Pramerica Mutual Fund under the current or new sponsor needs to reduce exposure to risky debt across all its schemes.