MFs have Rs 2,000-cr debt in IL&FS firms; NCLAT to hear case on March 12

Debt fund managers hopeful of priority repayment

Mutual funds (MFs) with exposure to the indebted Infrastructure Leasing & Financial Services (IL&FS) are grappling with how to deal with the situation.

According to the end-December portfolio details from sector analyst Morningstar India, MFs have lent to seven IL&FS firms. The total value of these holdings is Rs 2,036.1 crore. Most of it (Rs 1,894.8 crore) is in firms listed in the “amber” category, according to a Business Standard analysis.

Sixty-nine IL&FS group firms have been classified as red, green and amber based on their ability to service routine debt obligations. On February 11, the Centre and IL&FS’ new board  submitted an affidavit detailing three categories. Those with no cash were classified as red; those with enough to pay secured creditors but not unsecured ones were amber. Those in no position to pay any creditor were red. The National Company Law Appellate Tribunal (NCLAT) has allowed green firms to service debt obligations. The NCLAT on Monday said financial institutions should classify loans to the IL&FS group firms as non-performing assets (NPAs) without seeking a nod from the tribunal.

MFs also have stake in two firms classified as red. The status of one company, IL&FS Education & Technology Services, is still being decided.

“For those firms in the amber list, we are hopeful that as senior creditors, we will be repaid before others,” said a senior debt fund manager, who did not want to be named. “But there is no clarity when the repayments would start.”

The NCLAT is supposed to hear the matter again on March 12. Some fund houses marked down the IL&FS paper, but this treatment has not been uniform.

“Not everyone has marked it down to zero because the valuation guidelines are only up to the investment grade. The matrix that (the rating agencies) put out, are only up to the investment grade. Anything below that is up to the valuation committee of the AMC (asset management company),” said an MF expert.

The IL&FS SPVs (special purpose vehicles) were also asked to stop future payments to lenders by the management, after an NCLAT moratorium order.

As a result of this, rating agency Icra put HDFC Short Term Debt Fund, HDFC Banking and PSU Debt Fund, UTI Banking and PSU Debt Fund, UTI Bond Fund, UTI Dynamic Bond Fund, and Aditya Birla Sun Life Short Term Opportunities Fund under ratings watch.

The rating agency also downgraded Aditya Birla Sun Life Short Term Opportunities Fund from AA+MFs to AA MFs. The fund houses have taken a markdown on their exposures to the SPVs. HDFC Mutual Fund (MF) took a 25 per cent markdown on its exposures to Hazaribagh Ranchi Expressway (HREL), after considering the likelihood of rating downgrade of HREL to a below investment grade. 

Birla Sun Life MF has taken 20 per cent mark down on its exposure to Jharkhand Road Projects Implementation Company.

Clarity on other rules can also help address such situations, according to others.

“This is once again a situation which is not provided in side-pockets (rules), but must be provided for,” said Dhirendra Kumar, chief executive officer of fund tracker Value Research.

A side-pocket allows for instruments undergoing distress to be classified separately from the main portfolio for later resolution. Companies in which the default has not yet happened, but are stuck in limbo such as IL&FS firms, remain outside the purview of such a solution, he said.