Two mutual funds mark down IL&FS SPV debt

Two of the country’s biggest mutual funds have marked down the value of debt issued by two special purpose vehicles (SPVs) of Infrastructure Leasing & Financial Services as the troubled infrastructure investor’s financial woes continue to rattle financial markets.

Four months after parent IL&FS 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 the value of investments in debt securities of two road projects owned by a unit of IL&FS after one of them defaulted and the prospect of the other following suit remained high.


Not a Genuine Default
Rating agency Crisil downgraded bonds sold by Jharkhand Road Projects Implementation Company (JRPICL) to junk status and similar action awaits many of the road projects that are generating cash. But fund managers tried to calm nerves saying the 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 the mutual funds and the downgrades are unusual considering that the SPVs are generating cash and in a position to repay lenders. But the IL&FS management’s decision earlier this month to stop loan repayments and seek moratorium from the bankruptcy court has left mutual fund investors worried. Rating companies fear many assumptions under which lenders bought the bonds of the SPVs are now in doubt.

Investors and experts warn that this action by IL&FS and the 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 the collapse of such protection in the IL&FS case means investors will become even more afraid of lending.

“There was no need to take the 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 the IL&FS litigation. We have taken a 20% markdown loss. Customers need not panic as the impact is limited and temporary.”

There is “heightened risk of default due to reversal in the IL&FS management’s earlier stance of maintaining the integrity of Jharkhand Road Projects Implementation Company’s ring-fenced structure and structured payment waterfall. This had spawned untested legal risks for bankruptcy-remote SPVs”, said Crisil.

While Aditya Birla Sun Life’s decision follows a default by JRPICL, HDFC marked down the value of its investments in another IL&FS 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 the process of doing the 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 the fair value principle in light of recent developments and downgrades of similar structures,” said a UTI spokesperson. Aditya Birla Sun Life’s Credit Risk Fund, Dynamic Bond Fund, Medium Term Plan and Short Term Opportunities Fund have exposure to JRPICL. Aditya Birla Medium Term Plan holds the biggest chunk in the 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.