How does the IL&FS SPV episode impact you?

Investors need not exit in haste, as bonds issued by these SPVs are not a loss asset

If you were one of the unfortunate ones to suffer blips in net asset values (NAVs) of your debt funds after rating agencies’ sudden downgrades of IL&FS and its group entities last year, it’s time to sit up and take note of the recent shake-up too.

Three large mutual fund houses — Aditya Birla Sun Life, HDFC and UTI Mutual Fund — have marked down the value of their investments in bonds issued by IL&FS’ Special purpose vehicles (SPVs) by 20-25 per cent last week, leading to a 0.1-2 per cent fall in NAVs of specific funds with such exposures.

Here’s what you need to know.

Crux of the issue

Three SPVs of IL&FS came under focus after one of them, Jharkhand Road Projects Implementation Company (JRPICL), was downgraded by CRISIL to junk status ‘D’, after it defaulted on its payment due on January 21. This was despite the SPV having adequate funds to service the dues.

The reason for the default was the management’s decision to withhold payment of dues, citing the National Company Law Appellate Tribunal’s (NCLAT) stay order issued on October 15, 2018.

In a nutshell, the implications of this is two-fold for debt funds. One, funds having exposure to bonds issued by JRPICL, have written down the value of such investments by 25 per cent. Two, funds not having exposure to JRPICL, but having exposures to other IL&FS SPVs — Hazaribagh Ranchi Expressway Limited (HREL) and Jorabat Shillong Expressway Limited (JSEL) — have also marked down the value of such underlying bonds by a similar amount, in view of the high risk of these SPVs defaulting too.

This has resulted in the fall in NAVs of these funds by 0.1-2 per cent, depending on the extent of exposure that funds have to bonds issued by these SPVs.

Funds impacted

As per data available, various schemes from Aditya Birla Sun Life, HDFC, UTI and DHFL Pramerica Mutual Fund (fixed duration funds) have exposures to bonds issued by the three IL&FS SPVs. HDFC Short Term Debt Fund, HDFC FMP 1146D April 2018 (1), HDFC Credit Risk Debt Fund, HDFC Hybrid Debt Fund, HDFC Dynamic Debt Fund, and HDFC Banking and PSU Debt Fund have 0.2-8.6 per cent exposure to bonds issued by HREL.

Aditya Birla SL Credit Risk, Aditya Birla SL Medium Term, Aditya Birla SL Regular Savings, Aditya Birla SL Short Term Opportunities Fund, Aditya Birla SL FTP-OW-1245D, Aditya Birla SL Dynamic Bond, Aditya Birla SL Balanced Advantage have 0.1-9.2 per cent exposure to bonds issued by the defaulted JRPICL.

 

 

UTI Banking & PSU Debt Fund, UTI Bond Fund, UTI CCF- Savings Plan, UTI Dynamic Bond Fund, UTI Hybrid Equity Fund, UTI Retirement Benefit Pension, UTI ULIP, among others, have 0.2-7.4 per cent exposure to bonds issued by SPV JSEL.

Over the past three to four years, there have been several instances of rating downgrades and defaults that have hit NAVs of debt funds.

What’s different?

Specific to the IL&FS event, 40-odd debt funds had seen a blip in their NAVs after rating agencies downgraded IL&FS and its group entities last year.

But the recent episode regarding IL&FS SPV is somewhat different. One, in the earlier instances and IL&FS, in particular, it was the failure of the entities issuing bonds to repay their dues that led to the funds marking down the value of such bonds.

In the JRPICL case too, it has defaulted on its payment due on January 21. But this has not been on account of inadequate funds. In fact, it has enough funds to comfortably service its dues; around 4.5 times its quarterly debt obligation.

The reason for the default has been the management’s interpretation of the NCLAT order that has imposed a moratorium on, among others, financial facilities or obligations availed of by ‘IL&FS’ and its 348 group companies. Since annuities of SPVs flow into trustee-controlled escrow accounts, and are normally sheltered from stress at the sponsor/parent level, it is unusual for the management to withhold payment of dues.

What for investors?

Until clarity emerges on this, funds marking down their investments in the SPVs will pinch investors, as NAVs take a hit. But investors should not panic. After writing down the bond’s value, the scheme usually ends up recovering a part or whole of its dues. In this case, the IL&FS SPVs appear cash-rich and profitable and, hence, recovering dues should not be a challenge. NCLAT’s next hearing on January 28 should offer more clarity on the IL&FS SPV matter. Investors must not make a hasty exit, as the bonds issued by these SPVs are not a loss asset. However, delays in recovery of dues can remain a overhang until the matter is resolved.

Given that credit risks are inherent in debt funds, investors can shield themselves only to an by avoiding funds with high concentration in their holdings. Funds with 2-odd per cent fall in their NAVs are those that have higher 8-9 per cent exposure to bonds issued by IL&FS SPVs. Hence, always pick and choose funds with lower concentration to avoid sudden losses due to rating downgrades and default.

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