Everything you need to know about the ratings downgrade of Reliance Capital and Reliance Home Finance. RHFL bond now offers 50% yield

Bonds
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After IL&FS and DHFL, it now the turn of Reliance ADAG companies. In the past few days Ratings agencies have downgraded the ratings of Reliance Capital, Reliance Home Finance (RHFL) and Reliance Commercial Finance.

26 April

  1. CARE Ratings downgrades ₹12700 crores worth of long-term bank facilities from BBB+ to D
  2. CARE also downgraded ₹5,000 crore of debt issued by Reliance Commercial Finance from BBB+ to C.
  3. CARE again downgrades ₹4980 crores of long-term debt issued by Reliance Home Finance from BBB+ to D.
  4. ₹12320 crores of debt downgraded fro BBB/BBB+ to C.
  5. ICRA downgrades commerical papers issued by Reliance Capital, Reliance Commercial Finance and Reliance Home Finance commercial paper from ICRA A2 to ICRA A4.

Here’s how the bonds in cash market reacted:

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Symbol Series YTM at LTP (%) LTP Close % Chng Open High Low
RHFL N2 50.1415 829 940 -11.81 867 920 752
RHFL N4 32.1023 650 790 -17.72 687 750.5 632
RHFL N6 19.7913 625 781.2 -19.99 651 651 624.96

Impact on mutual funds

Mutual funds have around ₹2600 crores of exposure to Reliance Home Finance and Reliance Commercial Finance.

What will mutual funds do now

Depends on how the mutual funds value the securities. In case of a default, they will have to write off 100% of the value and the NAV will fall by that extent.

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Would someone want to buy that bonds?

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Assuming that the company pays out it’s obligation, you’ll make a killing. It’s a secured NCD by the way.

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I hold NCDS of Essar steel and Lml ltd which for which never received any pay out !

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How is interest paid in this NCD -annually , quarterly or monthly and from where we can get to know all the relevant details of the bonds which we are interested in.

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https://www.reliancehomefinance.com/web/guest/non-convertible-debentures

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Because someone got DHFL bonds when they had crashed and has already make a killing there? As per public reports, quite a few PE players were interested in purchasing these bonds from the secondary market.

I personally believe most HFC debt is a low risk investment since it is relatively easy to liquidate assets / loan portfolios at fair values to repay debt. Unless of course, the entire foundation on the company is built of fraudulent premises, then no money is ever coming back.

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Were they secured or unsecured?

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Is there any way to understand the level of security? To what extent does the collateral cover the outstandings?

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LML are secured ncd wherein Essar steel are redeemable preference shares.

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The prospectus should have the details.

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I have one query , when bond prices fell this much can’t issuer company buy back these bonds from secondary market and get some debt out of their books.

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Even if they could, they will not be inclined or perhaps even unable to do it. When facing a liquidity crisis, buying back longer term NCDs - even at 50% off - will probably hurt their chances of survival. Case in point, CARE downgraded RHFL’s long term debt to D - Default because they are having difficulties coughing up principal payments of only Rs. 542 Cr. out of 16,000 Cr of Total Liabilities. So, its hard to imagine them finding cash for buying back the Debt/NCDs that are not close to maturity.

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Bonds dont work that way. When a company wants to pull out its bonds from the market, this is called ‘calling back’ the bond. As per mandate, the company has to pull it out at face value only.

3 Likes