HDFC Mutual Fund has marked down the value of its holdings in Simplex Infrastructures in its credit risk debt fund by 49.64 percent after rating agency CARE Ratings further downgraded the company's non-convertible debentures (NCDs), the fund house said in a note to investors, a copy of which is in possession of Moneycontrol.
HDFC Credit Risk Debt Fund had an exposure of Rs 124.11 crore to Simplex's NCDs on November 25. After the markdown, the value of the security in its portfolio stands at Rs 62.5 crore as on December 11, a loss of Rs 61.61 crore.
On November 25, CARE downgraded the rating of Simplex's NCDs from CARE BBB to CARE BB+. On December 11, it further downgraded the Simplex's rating to CARE D due to a recent instance of delay in repayment of certain debt obligations. "Simplex's liquidity position has been affected by the elongation of its working capital cycle," the rating agency said.
Consequent to this downgrade, HDFC Credit Risk Debt Fund valued its Simplex exposure in accordance with the applicable SEBI Regulations and Circulars on the valuation of such securities.
Subsequently, HDFC Credit Risk Debt Fund had to take a 30 basis point hit on the net asset value (NAV) of the scheme due to the change in valuation.
However, there may be more losses to be absorbed in the scheme if Simplex defaults on the remaining amount due to HDFC Mutual Fund. The latter depends on an external agency for a credit ratings update.
The fund house though has said that Simplex plans to bring in 'strategic partner' who will infuse funds into the company. "Additionally, Simplex is also looking to monetise its shareholding in one of the road SPVs in the near term."
"Credit risk debt funds as the name suggests take extra risk compared to normal debt schemes," said a former SEBI official. Mutual funds need to have a more robust credit monitoring system in such funds to avoid mishaps, he added.
Simplex's NCD is secured. Its shares have fallen from to Rs 33.5 on December 13 from Rs 46.15 on November 25.
"This brings the flashpoint of asset management companies not encashing the equity share collateral at first instance of default, playing the wait and watch game which is causing NAV loss to investors of debt schemes like it happened in the case of Essel and ADAG group papers, and agreeing to postpone repayment of defaults under standstill agreements that was later objected by SEBI," said a mutual fund expert.
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