Two of countrys biggest mutual funds have marked down value of debt issued by two special purpose vehicles (SPVs) of Infrastructure Leasing Financial Services as troubled infrastructure investors financial woes continue to rattle financial markets.Four months after parent ILFS sparked a major crisis with its default prompting a rare government intervention, its cash-rich and profitable SPVs are now giving a different kind of headache to mutual funds and other debt investors.Aditya Birla Sun Life Mutual Fund and HDFC Mutual Fund on Monday marked down value of investments in debt securities of two road projects owned by a unit of ILFS after one of them defaulted and prospect of other following suit remained high.Not a Genuine DefaultRating agency Crisil downgraded bonds sold by Jharkhand Road Projects Implementation Company (JRPICL) to junk status and similar action awaits many of road projects that are generating cash.
But fund managers tried to calm nerves saying developments were due to litigation.Rival rating agency ICRA has placed six schemes belonging to mutual funds of Aditya Birla Sun Life, HDFC and UTI on rating watch due to deterioration in credit quality of underlying investments.The markdowns by mutual funds and downgrades are unusual considering that SPVs are generating cash and in a position to repay lenders.
But ILFS managements decision earlier this month to stop loan repayments and seek moratorium from bankruptcy court has left mutual fund investors worried.
Rating companies fear many assumptions under which lenders bought bonds of SPVs are now in doubt.Investors and experts warn that this action by ILFS and subsequent downgrades will have a major impact on debt financing for infrastructure projects.Infrastructure SPVs are generally protected from defaults by parent companies through ring-fencing.
But collapse of such protection in ILFS case means investors will become even more afraid of lending.There was no need to take full hit (mark down losses) as this is not a genuine default, said A Balasubramanian, CEO, Aditya Birla Mutual Fund.
There are cash flows, which are stuck in ILFS litigation.
We have taken a 20% markdown loss.
Customers need not panic as impact is limited and temporary.There is heightened risk of default due to reversal in ILFS managements earlier stance of maintaining integrity of Jharkhand Road Projects Implementation Companys ring-fenced structure and structured payment waterfall.
This had spawned untested legal risks for bankruptcy-remote SPVs, said Crisil.While Aditya Birla Sun Lifes decision follows a default by JRPICL, HDFC marked down value of its investments in another ILFS road project Hazaribagh Ranchi Expressway Ltd on fears that it may also not repay loans.HDFC Mutual Fund has written off 25% of its exposure in Hazaribagh Ranchi Expressway Ltd.
UTI is said to be in process of doing same for its exposure in Jorabat Shillong Expressway (JSEL).
HDFC Banking and PSU Debt Fund and HDFC Short Term Debt Fund saw their net asset values fall 0.14% on Monday.Our investments in JSEL will be valued at a price based on fair value principle in light of recent developments and downgrades of similar structures, said a UTI spokesperson.
Aditya Birla Sun Lifes Credit Risk Fund, Dynamic Bond Fund, Medium Term Plan and Short Term Opportunities Fund have exposure to JRPICL.
Aditya Birla Medium Term Plan holds biggest chunk in SPV of 4.2% amounting to about 400 crore.
The scheme, which manages assets worth 10,272 crore, saw its net asset value fall by 0.57% on Monday.Aditya Birla Sun Life Mutual Fund holds non-convertible debentures worth 685 crore in JRPICL while HDFC Mutual Fund holds papers worth 232.5 crore in Hazaribagh Ranchi Expressway.
UTI MF owns papers amounting to 559.07 crore in Jorabat Shillong Expressway.