Funds have exposure to debentures, commercial paper

The recent downgrade of Infrastructure Leasing & Financial Services (IL&FS) and IL&FS Financial Services has put at risk mutual fund investments worth more than ₹1,200 crore with fund houses like ICICI Prudential Mutual Fund, LIC Mutual Fund, Principal Mutual Fund, Motilal Oswal Mutual Fund and Tata Mutual Fund having exposure to the commercial paper or debentures issued by these firms.

According to data from Value Research, while ₹1,226 crore is the exposure to the debt papers of IL&FS and IL&FS Financial Services, the overall exposure of fund houses towards the group is almost ₹3,500 crore.

Group’s obligations

While the two firms have already been downgraded by rating agencies, three other companies — IL&FS Transportation Networks, IL&FS Tamil Nadu Power Company and IL&FS Securities Services — have repayment obligations towards fund houses. On Sunday, rating agency ICRA downgraded IL&FS as well IL&FS Financial Services, citing factors like high debt levels and liquidity pressure at a time when the companies are facing sizeable debt-servicing obligations.

Post downgrade, fund houses have to mark down the net asset value of the scheme, which impacts the return on investment for the investors in that scheme.

Tata MF’s note

Tata Mutual Fund, in a note to its clients, wrote that it was closely monitoring the liquidity position of IL&FS Group, which, as per the fund house, is in “discussions to manage liquidity through debt funding to tide over repayments for the near term. These steps are targeted to ensure the interim debt repayments to be timely so that no delays occur in this period.”

“We have received interest servicing by the group in August 2018 on a timely basis... we have commercial papers maturing in September through November 2018 and if the steps to infuse liquidity in the company as considered by the management of IL&FS is implemented, the probability of repayment of debt seems better,” Tata Mutual Fund wrote in the note.

In the case of IL&FS, ICRA had revised the long-term rating of non-convertible debentures worth ₹5,225 crore and term loans totalling ₹350 crore. It had also revised the short-term rating for commercial paper worth ₹2,500 crore. IL&FS Financial Services saw the short-term rating downgrade of its commercial paper worth ₹4,000 crore.