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Fixed Income

JP Morgan AMC Takes A Big Hit on Two Short Term Debt Funds – The Sword of Potential Default in Amtek Auto?

Remember Amtek Auto? That company that fell big time on the exchanges and the official excuse was that it was taken out of the F&O category?

Well, that’s not that only thing that seems to have been hit. JP Morgan AMC’s short term debt funds have seen a large dip in their NAV yesterday. From Invest Mutual:

JP Morgan Short Term Income Fund  -3.38% – This is a short debt fund with Avg Maturity of 3.59 yrs and a Modified Duration of 2.01

JP Morgan India Treasury Fund  -1.73% – This is an ultra short term fund with Avg Maturity of  0.51 yrs and Modified Duration of 0.37

This is HUGE. Because short term debt funds aren’t supposed to fall unless interest rates rise – people assume that the credit risk in the short term is very low. But look, it’s not!

Apparently the funds here have invested in Amtek Auto’s bonds. There’s a 10.25% Amtek Auto debenture that both the above funds hold:

  • The Short Term Income Fund holds 66 cr. worth bonds, which is 15% of its 430 cr. portfolio
  • The Treasury fund is an institutional plan has 134 cr. worth bonds which is 5.3% of its 2534 cr. portfolio

The problem? Well the bonds are maturing on the 20th of September 2015. And apparently that’s a concern. While I cannot find any evidence of any actual default, or even a trade in the secondary market in these bonds other than a small Rs. 20 lakh trade on August 26 at Rs. 100 (full face value) this may just be the beginning. JPM might have bought at more than Rs. 100 so they might have had to mark down their holdings.

What do you do?

Check your bond fund’s holdings. You can do that at valueresearchonline.com or at the AMC’s websites. If they hold Amtek Auto paper – or paper you are concerned about, exit the fund.

In fact check your short term funds and liquid funds – they shouldn’t be holding low rated bonds at all. And in the higher ratings, the government and bank bonds or CDs are best.

If you own the above funds, especially the JPM Short Term Income Fund, there’s a concern. If the fund owns 15% in a bond that doesn’t pay back – and it could take months to pay back – then returns will be crimped to that extent. 15% of your fund isn’t performing, and until you recover money – which takes years in India – that much of your portfolio is in limbo. You should consider exiting the funds right now.

We don’t know which other funds own Amtek Auto bonds just yet.

Here’s the list of debentures that are out there, and CARE has suspended ratings as of August 7 2015:

image

While about Rs. 200 cr. debentures are accounted for (JP Morgan’s two funds) – what about the remaining 1680 cr. of debentures? Do other mutual funds own them? IS JP Morgan just the first to actually take the hit (by possibly selling part of their bonds for a discount)?

That Early Warning…

We’ll know soon but this, if it is a default, is nearly 10,000 cr. And as you can see, while the debentures are 1900 cr. in total, the bigger hit is to the banking system if there is a default. But you can bet your last rupee that the banks will ignore this problem and feign a huge surprise when, oh my goodness, there is an actual default in Amtek Auto.

Bond and equity markets are the earliest warning systems you will get.

Update: JP Morgan Limits Redemptions

From the comments, Manoj Nagpal tells us what we didn’t want to hear: JP Morgan Mutual Fund has restricted redemptions to 1% of your holdings per day on the above funds. This means you’re never going to be able to exit. I suppose we will only have to wait till September 20 to know for sure if the fund will open this up – if Amtek Auto pays up, this fund will probably open up the redemptions. Livemint thinks they might just see the money come back.