The Infrastructure Leasing and Financial Services (IL&FS) crisis continues to pose challenges for the Rs 22-trillion mutual fund (MF) industry.
On Tuesday, rating agency Icra placed ratings of six mutual fund schemes under watch and downgraded one of these due to their exposures to the special purpose vehicles of IL&FS.
The schemes that were put under ratings watch are 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. Icra also downgraded Birla Sun Life Short Term Opportunities Fund from AA+mfs to AAmfs.
“The default risks by various SPVs of IL&FS have increased, given the recent communication by their management to trustees expressing to stop future repayments citing their interpretation of an order given by National Company Law Appellate Tribunal (NCLAT) on October 15, 2018. Further, in January 2019, two SPVs of IL&FS demanded a refund of the debt payment executed by them after October 15, 2018 from their trustees,” Icra in its note said.
According to industry sources, the fund houses are also considering legal action to settle their dues.
“The next NCLAT bench hearing is on January 28, 2019, which may provide further clarification on the issue. In case the interpretation does not come in our favour, the lenders are contemplating approaching the competent higher authorities. UTI AMC will take all necessary actions to safeguard the interests of its investors,” UTI MF said in its response to Business Standard.
UTI MF’s schemes have an exposure of about Rs 559 crore to the secured bonds issued by Jorabat Shillong Expressway (JSEL) as on January 21, 2019. According to debt fund managers, in normal course, the interpretation is to keep the cash flows within the common pool till the situation settles down, but this interpretation is not applicable to the SPVs.
Fund managers say concern on repayments of IL&FS SPVs stems from another 'ring-fenced' SPV of IL&FS Group — Jharkhand Road Projects Implementation (JRPICL) — not paying coupon payments to its bondholders due on January 21.
The NCLAT moratorium order on IL&FS and its group entities dated October 15 was cited as reason for the non-payment.
Among the three fund houses under ratings watch, UTI MF has the largest exposure (as percentage of its schemes) to IL&FS SPV.
According to Icra note, UTI Banking and PSU Debt Fund, UTI Bond Fund and UTI Dynamic Bond Fund’s exposure to JSEL stood at 6.87 per cent, 5.98 per cent and 6.25 per cent of their respective asset under management (AUM) as on December 31, 2018.
The fund house will value its investments in JSEL at a price based on the fair value principle in the light of recent developments and downgrades of similar structures. The fund house re-iterated JSEL’s capability to service its own debt.
Meanwhile, HDFC MF has decided take a 25 per cent markdown on its exposures to Hazaribagh Ranchi Expressway (HREL) considering the high likelihood of rating downgrade of HREL to below investment grade.
The exposure of HDFC Short Term Debt Fund to HREL is at 0.55 per cent of its AUM, while HDFC Banking and PSU Debt Fund’s exposure is 0.29 per cent of its AUM to HREL, according to the Icra note.
Birla Sun Life’s Short-Term Opportunities Fund’s exposure to JRPICL is at 1.15 per cent of the scheme’s AUM.