With debt exposure at Rs 56,000 cr, MFs' infra bets come under IL&FS cloud

The mutual fund (MF) industry’s bid to optimise yields on debt portfolios have led them to load up on exposure to the infrastructure space. However, experts say that the recent instance of IL&FS’ special purpose vehicle (SPV) denying repayment to bondholders, coupled with challenges in Essel group’s infra investments, doesn’t bode well for the MFs’ infra bets. 

“A significant share of these infrastructure investments would be in annuity structure projects that allow reasonable cash flows. However, the recent case of an IL&FS SPV not paying coupon payments to bondholders is a bad precedent and a cause of concern for MFs holding such exposures,” said Kaustubh Belapurkar, director (fund research), Morningstar Investment.

MFs have taken exposure to Essel group entities, including a road-related SPV, where promoters’ shares are placed as collateral. According to analysts, in instances where enhanced collateral is not forthcoming, the practice of giving loans against shares could hurt the net asset value of the schemes.  

As of December 31, 2018, MFs’ debt exposure to the infrastructure space stood at Rs 56,000 crore, which is double of what it was at FY16-end, shows data from Value Research. Some industry experts question the rationale for fund houses taking large exposures to capital-intensive sectors like infrastructure. 

“Sectors like infrastructure that are regularly in need of capital infusion don’t make for safe investments and we are seeing these risks play out now,” said Dhirendra Kumar, chief executive officer of MF tracker Value Research.

A debt fund manager, requesting anonymity, said a new legal interpretation seems to have emerged in the case of IL&FS SPVs, going by which these structures are holding up re-payments despite having cash flows to service them. He added that this new interpretation is the major cause for worry. 

On Monday, the National Company Law Appellate Tribunal allowed 22 of the 173 IL&FS entities to service their operational and financial debt obligations. Meanwhile, analysts are of the view that lenders might need to take haircuts on some of their exposures to road assets in the future. “We expect recovery to be slower. Our sample study (of select speculative rating category) reveals the need to take haircuts for debt sustainability, given the elongation of loan tenor may not offer desired results,” India Ratings said in a recent note.  

“We continue to be concerned about the rising stress in the Indian infra space in the absence of resolution, and flag the risk of bad-landing especially via debt-for-equity structures and leverage buyouts,” said analysts at CLSA. 

Experts said promoters pledging shares to borrow for unrelated diversification or other purposes should make MFs wary of such investments.