October 17, 2015

More Rating Mystery

After my earlier post, about two weeks ago, I was not expecting to have something to write about fund ratings this soon.  It seems I was wrong.

On Thursday, CRISIL announced that it had placed its rating of JPMorgan India Treasury Fund under “Notice of Withdrawal” based on a request by the fund house.  By itself, this would seem to be a straightforward development.  After all, no fund house, in its right mind, would want to use a BBBmfs rating.  But the release didn’t stop at that.  For reasons best known to CRISIL, in this release, it also chose to explain its current rating, updating its explanation in the last release with a reference to the segregation of the Amtek Auto investment.  This is what triggered this post.  I reproduce below a section of the release that I am unable to make sense of. 

On September 28, 2015, JPMAMIPL had allowed redemption in the scheme, following segregation of the specified security in the
scheme’s portfolio upon receipt of unit holders’ approval. This resulted in intensified redemption pressure in the scheme, and therefore, an increased weightage of the specified security. The downgrade in the scheme’s rating reflects the expected increase in the weighted average credit score for the portfolio.

The rating remains on ‘Watch with Negative Implications’ as CRISIL expects the redemption pressure on this fund may remain elevated. Should the redemption pressure exceed current expectation, the weightage of the specified security in the portfolio will increase significantly, further weakening the scheme’s credit quality.

As far as I have been able to make out, these are the facts of the segregation:

  • As soon as the segregation was approved, the NAV of the scheme fell to reflect the segregation of the said security.
  • Investors in the scheme on the date of the segregation took a hit on the value of their investments.  Investors who invest after that date will remain unaffected by the segregation. 
  • If the value of the segregated security is recovered, only the investors who were there on the date of the segregation have a claim on that value. 

What this means is that there is no further downside on account of that security to existing as well as new investors.  To put it differently, an investor who is going to buy into the scheme, in effect, will not be buying into that security.

Thus, if a rating has to be given on the portfolio now, why would this security have any bearing on that rating, no matter how much the portfolio shrinks?

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