As liquidity concerns grow in the market, Franklin Templeton Asset Management on Monday said non-banking financial companies (NBFCs) have lower risk profile than many manufacturing companies.
In an interview to CNBC-TV18, Santosh Kamath, chief information officer-fixed income, said, "In 2008-2009, where the entire world was collapsing and NBFCs came back very strongly, why will they not come this time? Please don’t read too much into that 11 percent sale."
Kamath said, "NBFCs now is a bit scary world, but there are very good NBFCs, promoted by very strong promoters, they will get lot of money. If they are smart, they will offer you much lower yield than what they should. It's like what happened in 2008-2009, SBI got all the money."
Q: What is your sense, with RBI and Sebi saying that they stand ready to act, will the redemption pressure ease?
A: Let me put it this way. Last 25 years, I have been working, I have never received so many calls from equity guys to understand fixed income markets. So, at last, I think fixed income is getting its due in some sense. If you ask me what is the big theme, the big theme was a downgrade of AAA rated company. We have enough non-performing accounts (NPAs) in the system, some are getting resolved, and a few will take some time, but the big theme was AAA entity going to default.
So, whenever such companies go to default or NPA happens, we typically put them in two buckets. First bucket is that the asset value is more than the liabilities, but there is a mismatch of liquidity. So, we put them as a liquidity concern. Second, where asset value is lower than the liability value. If it's first, there is some mismatch on liquidity, you need to sell some assets or somebody has to handhold you for some liquidity and things go normal. Fixed income side, you may have to provide something till the time the asset sale happens, and when the asset sale happens, you can provide it back to 100. Equity guys can make a lot of money on this, because when this liquidity issue happens, the rating goes down, equity market will take it negatively, and then it can bounce back. Most of the steel companies if you look around two years back, were exact in the same stage – good assets, but liability mismatch, a few assets got sold and then it came back.
Second set of companies are where the asset value is not equivalent to liability value. There can be two sub-divisions into it, one sub-division could be, where the money has been taken off, corporate governance issue and there is very little value in the asset. So let us keep them away. Second type of companies, where the asset value is lower than liabilities, maybe 10-30 percent lower, if everyone agrees that there is a 20 percent gap and everyone takes a 20 percent haircut, the equity value goes to zero, the company is fantastically normal. However, if you delay this process and do not recognise it, the category ‘A’ company will go to category ‘B’, because your interest keeps building up, you are not selling asset and sooner or later you go to ‘B’ and ‘B’ will go to ‘C’. So most of the NPAs will fall in this bucket.
Non-banking finance companies (NBFCs) is a tricky thing. In NBFC, people typically feel NBFC is very high risk. I have been hearing this for the last 25 years, but believe me, a well-managed NBFC according to me is better than a well-managed manufacturing company. Why is that? If an NBFC has an ‘X’ amount of assets, they do not have concentrated on any one industry. If you are putting a steel plant, the entire asset is linked to your steel cycle. You are putting a cement plant, everything is linked to your cement cycle. If you are NBFC and you are giving loans to so many different industries and companies, so, you are obviously much more diversified. However, there is a big fear on NBFCs, because of the leverage in the NBFCs.
Q: In terms of numbers, can you share some numbers with us. Has the redemption pressure gone up, what have the redemptions looked like for the industry, for your own company?
A: I do not know if I can say this on national TV, but we have been seeing inflows in our funds. There are two type of categories in mutual funds, in fixed income funds. One type of category, where the inherent belief is that this kind of funds will only buy AAA and AA+ and therefore, these are patronised by large investors, corporate investors. The other set of funds are credit funds, where typically you have three year exit load, retail money comes in those kind of funds and those are supposed to take credit risk and make money on that.
Unfortunately, IL&FS paper was in the AAA fund, which went default. If you ask me how does it matter if 1-2 percent loss on the net asset value (NAV)? It does not. You had G-SEC falling by Rs 10 in a year, there is some negativity, but there is no panic. Similarly, a two percent fall in NAV or three percent fall, I do not think should be a big panic. But having said that, some large investors may say let me redeem. However, most of the other assets in those kind of funds will be highly liquid assets.
Q: But they didn’t turn out to be liquid, that is the point. When one fund tried to sell maybe not even for a redemption pressure, maybe just to stay in cash in advance, the deal happened at 11 percent. So, deal happened a good 75 basis points higher than the previous deal. So, what we are asking you is now with RBI and Sebi saying this and some early indications that IL&FS will be resolved, will any fixed income guy refinance in NBFC paper?
A: Obviously, yes. In 2008-2009, where the entire world was collapsing and NBFCs came back very strongly, why will they not come this time? Please don’t read too much into that 11 percent sale. I would want to tell your viewers, if you want to sell a slightly liquid G-Sec, you may have to sell at 50 paisa lower than the market price, so there is not a big deal. Now, somebody had some redemptions on some view or could sale some Rs 100-200 crore at slightly higher yield, I don’t think that is any reason to worry.
Q: You think all the DHFL’s, Indiabulls and all will be able to refinance their commercial paper?
A: I do not want to comment on any particular company, but as a sector, well-managed NBFC with a 5-6 time leverage, with 20 percent capital adequacy, if you are 5-6 percent leveraged, means 20 percent capital adequacy, 20 percent equity has to be wiped out before the debt guys get impacted. Now, do you think there will be 20 percent NPA in the system? There could be two or three or four. So, solvency is not an issue. On liquidity, you will be surprised to know, I just read some reports, most of the large NBFCs are positive on asset-liability management (ALM). It means, they have more assets maturating in one year.
Q: That they told us on the channel and every one expects that for the next six months, they will be able to pay back, redeem. But the point is, will they get fresh money? The equity market is worried that their growth will be hurt, they don’t expect default. But will you buy their fresh offerings?
A: Frankly, it's a competitive world. If somebody offers me a higher yield, which I think the risk is low, if I need to compete against my peer’s group, I will go and lend, and then, second guy will and then, third guy will lend. But believe me, this will happen. It's not that nobody is going to lend to anyone.
The same point of time, I am not an equity guy, but I can tell you one thing, whenever this kind of EBIT (earnings before interest and taxes) negativity happens, few companies benefit a lot. So, mutual funds can invest theoretically 25 percent of corpus in NBFCs. NBFCs now is a bit scary world, but there are very good NBFCs, promoted by very strong promoters, they will get lot of money and if they are smart, they will offer you much lower yield than what they should. It's like what happened in 2008-2009, SBI got all the money.
Q: We had a statement from Arun Jaitley just a while back, where he said the government will take measures to provide liquidity if and when required to mutual funds. What do you think those measures could be?
A: If you ask me, if the market believes that there will be measures, there won’t be any need to do something. So, it's all confidence boosting measures. If repo line can come up for corporate bonds – but most of the time, if two or three large regulators are telling you something, finance minister is telling you something, I don’t think we will require the line anyway.