After last week’s sharp fall in the NAVs of Taurus MF’s liquid and debt schemes, the media and other commenters were quick to link it to their high level of exposure to the downgraded commercial paper issued by Ballarpur Industries Ltd (BILT). While that is correct, there is more to the investments made by these schemes in BILT than what has been pointed out. In this post, I try to spotlight some of that.
A lot of people have drawn comparisons with the erstwhile JP Morgan MF and the fall in its schemes’ NAVs about eighteen months ago or so. Just as in the case of JP Morgan MF, here, too, the fall in NAVs was triggered by a questionable mix of credit risk and concentration risk. But there are some key differences. One of these is that Taurus MF had ample opportunity to take corrective action, yet it didn’t.
To better understand this, we need to go back a bit in time and look at the investments made by the fund house not just in BILT, but in its subsidiary, BILT Graphic Paper Products Ltd (BGPPL) as well. While these are separate companies, for their rating, the rating agency, India Ratings and Research (Ind-Ra) has been taking a consolidated view of both companies, given “their strong operational and strategic linkages” due to their “similar business profiles and a common treasury and management team.” Thus, both companies were given identical ratings and when BILT’s rating was downgraded, so was that of BGPPL.
Throughout 2016, the investments made by Taurus MF in BILT and BGPPL appear to have been in the short duration commercial paper issued by them, mostly with a maturity of 30 days or less. While some of these were genuine short-term investments, a number of these seem to be serial investments, if I may say so, that were rolled-over into fresh investments on maturity. Regardless, there was one noticeably odd characteristic through most of 2016: the investments in the liquid scheme were made in a manner that these did not reflect in the month-end portfolios.
Until 15 July 2016, BILT and BGPPL enjoyed the highest short term rating given by Ind-Ra i.e. Ind A1+. Despite this rating, there was enough reason to suspect that all was not well with these companies. Consider this: in June 2016, Taurus MF invested in 27-29 day commercial paper of five other companies with a similar A1+ rating at yields ranging from 7.09% pa to 7.99% pa. In comparison, its investment in the 28 day commercial paper of BILT and BGPPL was at a yield of 11.00% pa. No doubt, this was, by far, the most profitable investment in their portfolio. But as should be obvious, high yields usually imply less-than-stellar creditworthiness.
Sure enough, on 15 July 2016, Ind-Ra downgraded the short term rating of both these companies to Ind A1. But that didn’t seem to bother the fund house and it continued to invest in both these companies.
Then on 30 December 2016, Ind-Ra made a second, steep downgrade of that rating to Ind A3. Moreover, Ind-Ra stated that in the next three months, depending on the outcome of a certain event, this rating could be further downgraded. To put this into perspective, such a downgrade would mean that their commercial paper would no longer be ‘investment grade’. It was as clear a signal as one could possibly get that these companies were severely stressed.
At the start of 30 December 2016, the face value of Taurus MF’s investments in BILT and BGPPL stood at 107.5 crore. Of this, investments worth 32.5 crore were scheduled to mature between 5 January 2017 and 16 January 2017. But the entire remaining investments worth 75 crore happened to be maturing on that very date i.e. on 30 December 2016. A prudent approach would have been to encash those investments. Instead, in what I can only describe as a highly dubious decision, the fund house made a fresh purchase of BGPPL commercial paper for the exact same face value that they got as maturity proceeds.
So why did Taurus MF do something like that?
One view is that this was an act of recklessness, driven by greed for higher returns.
An alternate view, and this is speculation, is that BILT and BGPPL were likely to have defaulted on payment of those maturity proceeds and that the fresh purchase was a means to cover that up. Irrespective of how you feel about this, there are some observations that lend credence to this speculation.
Firstly, going by the portfolio disclosures of a day later, the exposure of each scheme was at astonishingly high levels, as illustrated in the table below. Showing a default on the books would have been catastrophic.
| Scheme Name | % Exposure as on 31 Dec 2016 |
|---|---|
| Taurus Liquid Fund | 10.02% |
| Taurus Ultra Short Term Bond Fund | 24.51% |
| Taurus Short Term Income Fund | 23.79% |
| Taurus Dynamic Income Fund | 16.88% |
Secondly, from that date, and until 14 February 2017 (the latest date for which information is available), on each date that issuances from BILT and BGPPL came up for maturity, there was a fresh purchase of their paper by the fund house for exactly (or almost exactly) the same face value, as the table below shows.
| Date | Total Amount Held (on start of date) | Total Amount Sold on Maturity | Total Amount Purchased Again |
|---|---|---|---|
| 30-Dec-16 | 107.5 | 75.0 | 75.0 |
| 05-Jan-17 | 107.5 | 20.0 | 20.0 |
| 12-Jan-17 | 107.5 | 7.5 | 7.5 |
| 16-Jan-17 | 107.5 | 5.0 | 5.0 |
| 19-Jan-17 | 107.5 | 75.0 | 75.0 |
| 23-Jan-17 | 107.5 | 5.0 | 5.0 |
| 24-Jan-17 | 107.5 | 27.5 | 27.5 |
| 31-Jan-17 | 107.5 | 80.0 | 79.8 |
| 06-Feb-17 | 107.3 | 5.0 | 5.0 |
| 07-Feb-17 | 107.3 | 22.5 | 22.3 |
| 13-Feb-17 | 107.0 | 45.0 | 45.0 |
| 14-Feb-17 | 107.0 | 39.8 | 39.8 |
I also find it remarkable that though BGPPL stopped issuing commercial paper (somewhere in mid-January), on each date that its existing paper came up for maturity, the fund house made a fresh purchase of commercial paper issued by BILT for exactly the same face value.
| Date | BILT Amount Sold On Maturity | BGPPL Amount Sold On Maturity | BILT Amount Purchased | BGPPL Amount Purchased |
|---|---|---|---|---|
| 05-Jan-17 | 20.0 | - | 20.0 | - |
| 12-Jan-17 | - | 7.5 | - | 7.5 |
| 16-Jan-17 | - | 5.0 | 5.0 | - |
| 19-Jan-17 | - | 75.0 | 75.0 | - |
| 23-Jan-17 | - | 5.0 | 5.0 | - |
| 24-Jan-17 | 25.0 | 2.5 | 27.5 | - |
| 31-Jan-17 | 80.0 | - | 79.8 | - |
| 06-Feb-17 | 5.0 | - | 5.0 | - |
| 07-Feb-17 | 22.5 | - | 22.3 | - |
| 13-Feb-17 | 45.0 | - | 45.0 | - |
| 14-Feb-17 | 39.8 | - | 39.8 | - |
Last but not the least, is the fact that since 1 January 2017, every issuance of commercial paper by BILT and BGPPL, ranging from a maturity of 7 days to 19 days, has been at an absurdly high yield of 14.25% pa. Think about it: what sort of company would borrow at that rate?
Perhaps it would be best if Taurus MF clears the air on all of this.
