IL&FS SPV fallout: Ratings of 6 MF schemes under scanner of ICRA; see if you are impacted

IL&FS Transportation Networks | The company defaulted on the interest on non-convertible debentures due on August 25, 2020. (Image: Reuters)

Ratings agency ICRA has placed ratings of six mutual fund schemes from three fund houses -- HDFC, UTI and Aditya Birla -- under watch with negative implications due to their exposures to special purpose vehicles (SPVs) of beleaguered Infrastructure Leasing & Financial Services (IL&FS).

These six schemes 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.

Of these six schemes, ICRA has downgraded Aditya Birla Sun Life Short Term Opportunities Fund to [ICRA]AAmfs from [ICRA]AA+mfs and brought the rating in line with five other schemes.

Rating of the balance five schemes ([ICRA]AAmfs) have been kept under watch.

ICRA noted that the above mentioned schemes have exposures to IL&FS SPVs: Hazaribagh Ranchi Expressway (HREL), Jharkhand Road Projects Implementation Company (JRPICL) and Jorabat Shillong Expressway (JSEL).

“The rating action takes into account deterioration in the credit quality of the underlying investments of these schemes, driven by their exposure to the SPVs of IL&FS,” ICRA said in its note.

According to the rating agency, as on December 31, 2018, exposure of HDFC-Short Term Debt Fund and HDFC Banking PSU Debt Fund to HREL stood at 0.55 percent and 0.29 percent, respectively, of its total asset under management (AUMs).

During the same period, the exposure of UTI Banking and PSU Debt Fund, UTI Bond Fund and UTI Dynamic Fund to JSEL stood at 6.87 percent, 5.98 percent and 6.25 percent, respectively.

As on December 31, 2018, the exposure of Aditya Birla Sun Life Short Term Opportunities Fund to JRPICL stood at 1.15 percent.

Default risks by various SPVs of IL&FS aggravated after the recent communication by the company’s management to trustees, expressing stoppage of future repayments, citing their interpretation of an order given by National Company Law Appellate Tribunal (NCLAT) on October 15, 2018, ICRA said in a note.

“Normally, inflows in the SPV would first be utilised to repay interest and principal due of debt holders and only the remaining cash flows would be sent to the common pool,” said Mahendra Jajoo, Head-Fixed Income, Mirae Asset Global Investments.

However, fund managers said that IL&FS management seems to have advised trustees that in their interpretation, NCLAT moratorium also covers dues to be paid to lenders in the SPV and accordingly all collections should be merged with the common pool and no preferential payment should be made to SPV debt holders.

In January, two SPVs of IL&FS had demanded a refund of the debt payment executed by them after October 15, 2018 from their trustees.

Despite a ring-fenced structure and adequate cash flows to service the debt obligations, the SPVs asked the trustees to stop debiting the SPVs' escrow account towards its future obligations.

“In case of delays in honouring its obligations by SPVs, the ratings for these SPVs are likely to be downgraded, thereby impacting the credit score of the mutual fund schemes having exposure to these SPVs. The ability to rebalance the portfolios for these schemes within a month of rating action will remain a key rating driver. ICRA will continue to monitor the portfolios of these schemes regularly and take appropriate rating action as and when required,” ICRA said its note.

Recently, rating agency Crisil had majorly cut creditworthiness of two IL&FS SPVs too claiming 'heightened risk' of defaults as IL&FS management had taken a new stance on repayments.