A debt fund of DSP Mutual Fund named DSP CREDIT RISK FUND was holding IL&FS commercial Paper (CP).
This paper were rated AAA.
But last week IL&FS made an interest default hence its rating went down to D.
Redemption pressure came to this fund.
Hence DSP MF sold AAA rated 9.1% paper of DHFL as they needed big fund and hence this quality paper was sold at a steep discount to meet the redemptions.
Fine…this was debt market operations
but its repercussion were seen in DHFL stock… thinking its paper was sold at steep discount… hence company must be in some trouble.
This led to fear of all NBFCs specially HFC’s will have big problem and it triggered sell off in all the NBFCs.
Then followed by banks and YES Bank was already in bad news.
Leading to overall sell-off and volatility.
Now Post this NBFC Sell Off What is expected ahead ?
(1) Due to the redemption pressure on DSP Blackrock MF, the fund house had to sell DHFL Bonds at net yield of 11% whereas as per Issue DHFL had yield of 9.1%. This means the Bond was sold at 18% steep discount (Rs.100 bond sold at Rs. 82). After this so many clarifications are coming up by DHFL that it was a secondary market deal wherein they have nothing to do.
(2) Why did DSP Sell?
Ans : Because DSP faced redemption pressure from the Corporate clients holding Funds that have exposure to IL&FS due to downgrade of rating to D from AAA.
This redemption pressure would have resulted in default by DSP and hence they had 2 options :
(a) Either sell GSec
(b) Sell DHFL Bonds as investment at a loss.
Now Gsec is already in loss due to Bond yield having risen hence logically if the loss is same it’s better to sell Corporate Bonds.
(3) Now hereafter other AMCs having exposure of Rs.2800 crores to IL&FS bonds would get redemption pressure from Corporate clients who have invested in this Rs 16 trillion Debt MF industry. Assuming the avg exposure to IL&FS Bonds as 3% of Gross portfolio this means the value of AUM in such affected funds is Rs. 94,000 Crores. Assuming 25% of such investments are by Corporate Client who do not wish to hold D grade funds the redemption pressure would be a whooping Rs. 23000-24000 Crores.
(4) It’s impossible for such schemes to get this amount in a week. Further, illiquid Corporate debt market and DHFL saga results in the fact that AMCs have no option but to sell GSec. Hence, GSec will face a huge selling pressure so either Bond Yield will shoot up to 8.30-8.50% levels or the RBI has to do OMO (Open Market Operations).
(5) If RBI Opts for OMO then the governments spending capacity will reduce by an equal amount and given that elections are around the corner it is impossible for Govt to allow Rs. 24000 Crores out of the system.
(6) The government has only 1 solution: It will have to tell LIC to save IL&FS by ensuring no further defaults specially to Banks and Mutual Funds till elections in order to avoid a financial system crash that will involve a lot of banks, nbfc and Mutual Funds.
(7) At the end of the day public money will be used by LIC to save IL&FS and prevent further defaults.
This will relax the Corporate bond market and stock markets from further panic!