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Table1: UTI Mutual Fund : Receiving a big blow ...
(Data as on April 30, 2019)
(Source: ACE MF)
These losses are on account of UTI Mutual Fund's decision to mark down its exposure to the Jorabat Shillong Expressway (JSEL)-a Special Purpose Vehicle (SPV) of IL&FS. So far, the fund house has taken the haircut of 50% on its investments in the SPV.
Are these losses permanent?
Well at the moment, nobody knows.
JSEL has been facing the insolvency suit, which is pending with the National Company Law Appellate Tribunal (NCLAT). Independent credit rating agencies have assigned the default rating (D) to the papers issued by JSEL.
The fund house believes once NCLAT passes the final resolution on the JSEL insolvency case, the company will resume the repayment cycle. Addressing its investors, UTI Mutual Fund exuded confidence "Current cash & bank balances of JSEL (lien marked to the debenture trustee) are more than sufficient to service liabilities of all senior secured lenders."
The fund house also reiterated that being a senior secured lender, its loans to JSEL are supported by the annuities from National Highway Authority of India (NHAI).
How far can the IL&FS crisis drag?
IL&FS has been making headlines for last the eight months-ever since its subsidiaries defaulted on the debt obligation. In hindsight, it looks like IL&FS was destined for doom at some point. Unfortunately, none of the entities, including mutual funds, took the problems at IL&FSseriously.
When the story began to unfold in September 2018, mutual funds collectively had an exposure of Rs 2,130 crore to IL&FS and its group companies. As per the portfolios disclosed on April 30, 2019, mutual funds still hold IL&FS debt worth Rs 1,432 crore.
Will any sensible lender sanction loans worth Rs 91,000 crore to any entity whose parent company has the share capital of just Rs 9 crore?
However, mutual fund houses aren't the only ones in hot water, Public Sector Banks (PSBs), and other state-owned entities are glaring at unimaginable losses, as all of them have sanctioned loans despite knowing this.
What's the way forward?
For now, it hinges heavily on how all the stakeholders handle the situation. At a time when India's entire financial system has been facing a liquidity crunch, writing down debt worth nearly Rs 1 lakh crore isn't easy. The cascading effects can be enormous.
If there's an unfavourable resolution and asset monetisation attempts of IL&FS and its subsidiaries fail or meet with a tepid response, lenders including mutual funds will have to take bigger haircuts. You should also stay away from other mutual fund schemes that have exposure to the toxic papers of IL&FS.
Table 2: Other debt schemes having exposure to IL&FS
(Data as on April 30, 2019)
(Source: ACE MF)
Schemes with higher exposure (as a percentage of the portfolio) are more vulnerable as compared to those with nominal exposure. For example, HDFC Dynamic Debt Fund(G) may report steeper write-offs if it fails to recover money from IL&FS as compared to HDFC Credit Risk Debt Fund-(G), which has a comparatively lower exposure.
Isn't it unusual that a dynamic bond fund has made higher investments (as a percentage of the portfolio) in a vulnerable company as compared to the one made by a credit risk fund? This is another indicator of how miserably mutual fund houses and their fund managers have misjudged the risk involved in debt propositions.
Various media reports suggest that IL&FS has 169 subsidiaries, which include 135 indirect ones and SPVs. Is lending to subsidiaries with unsustainable businesses justified just because IL&FS' promoter group has some marquee names such as LIC, HDFC, and SBI?
It seems mutual fund managers believe they can get away with anything.
So far, that may be true. But, if IL&FS debt fiasco worsens hereon, mutual funds have plenty to lose.
Investors should stay away from debt funds given the severity of the on-going corporate debt mayhem.
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