The next entity that could probably give sleepless nights to some debt fund managers and investors is the Coffee Day group.

Remember the tagline 'A Lot Can Happen Over Coffee'? Unfortunately a lot has happened for the entire Coffee Day group.

Cafe Coffee Day has been in the news this week after its founder Mr. V G Sidhhartha went missing, and gave up his life amid rising debt obligation, resulting in an irreplaceable loss to the Coffee Day group.

Table: Coffee Day debt exposure across mutual funds

Scheme Name	Asset Type	Company Name	Rating	Hold Percentage	Market Value (Rs Cr.)
BOI AXA Credit Risk Fund	Corporate Debt	Coffee Day Natural Resources Pvt. Ltd. 6% (23-Dec-19)	BWR A-(SO)	0.28	0.57
BOI AXA Short Term Income		Coffee Day Natural Resources Pvt. Ltd. 6% (23-Dec-19)	BWR A-(SO)	19.34	16.06
DSP Credit Risk Fund		Coffee Day Natural Resources Pvt. Ltd. 6% (23-Dec-19)	BWR A-(SO)	3.92	132.08
Indiabulls Savings Income Fund	Corporate Debt	Tanglin Development Ltd. 1.25% (22-Nov-19)	BWR A-(SO)	56.46	11.45
Indiabulls Short Term Fund		Tanglin Development Ltd. 1.25% (22-Nov-19)	BWR A-(SO)	5.50	5.95
Indiabulls Income Fund		Tanglin Development Ltd. 1.25% (23-Jan-20)	BWR A-(SO)	8.28	0.95
Indiabulls Short Term Fund		Tanglin Development Ltd. 1.25% (23-Jan-20)	BWR A-(SO)	24.27	26.22

Portfolio as of 30-June-2019. The exposure might change as of 31-July-2019.
(Source: ACE MF)

​Spread across three mutual fund houses - DSP Mutual Fund, Indiabulls Mutual Fund, and BOI Axa Mutual Fund -- six debt mutual fund schemes held combined exposure worth Rs 193 crore in Coffee Day group companies -- Coffee Day Natural Resources Pvt. Ltd. (Rs 148.7 crore) and Tanglin Developments Ltd. (Rs 44.6 crore). (Data as of June 30, 2019)

Currently rated BWR A-(SO) by Brickwork Ratings, the instruments issued by these companies may be under scanner of the rating agency with a negative bias. Any rate cut may result in erosion of value and write-offs by the fund houses, thus resulting in loss to investors.

The largest at risk is DSP Mutual Fund that through its Credit Risk Fund had a total exposure of Rs 132 crore (as of 30^th June) in corporate debt instruments issued by Coffee Day Natural Resources Pvt. Ltd., maturing in December 2019. However, the allocation is about 4% of the total assets held by the fund. Nevertheless, the AMC has reported that its Credit Risk Fund has reduced the exposure to Rs 80 crore after it got some repayment in July.

Going by the allocation, the funds that could have major impact on their valuations are Indiabulls Savings Income Fund and Indiabulls Short Term Fund that have an allocation of around 56% and 30% respectively in instruments issued by Tanglin Development Ltd., an entity in the business of real estate.

On the other hand, BOI AXA Short Term Income held almost 20% of its assets in corporate debt instruments issued by Coffee Day Natural Resources Pvt. Ltd. and has almost 1/5^th of its portfolio at risk.

How deep is the Indian debt crisis?

It is not the first time that credit defaults have hurt Indian debt markets and mutual funds. The IL&FS fiasco, driven by rating downgrades and defaults, has already resulted in the dry up of funds for NBFCs and has had a cascading effect on entities such as DHFL, Essel Group, Reliance ADAG Group, and Yes Bank.

The borrowing rates have shot up for NBFCs and raising funds has become difficult, creating more difficulties in their business sustainability.

Mutual funds are struggling to get the money back, whereas many funds have already booked losses by writing-off their bad assets or have side-pocketed assets in the hope of getting their money back some day.

With limited intervention of the Government and lack of any concrete measures in cleaning up the private credit mess, the situation is likely to be more vulnerable at this point, than it looks.

The unfolding of multiple credit events in a short span of time has already caused panic among debt fund investors with many exiting their debt fund investments at the first sign of trouble.

What should investors do?

It is noteworthy that India's financial system is vulnerable to cascading effects of the poor credit quality of corporates.

Many NBFC's and private entities may have to bear the brunt of worsening fundamentals if liquidity remains scarce and the economy fails to revive.

Speaking about debt funds with exposure to Coffee Day group companies, there is a high probability of default and some funds may even write-off their bad assets, thus causing a deep loss in NAV. Higher the concentration to these companies in the portfolio, higher the impact on valuation will be.

It would be prudent to give these funds a miss and follow a more prudent approach.

Do not forget, debt funds carry their own set of risks. Be cautious and assess your risk appetite before choosing a fund for your portfolio.

If you can't handle even a slight drop in your invested capital, just stay away from debt funds, especially those holding exposure to private entities. It may not be your cup of coffee!

Add Comments