IL&FS, an infrastructure developer has defaulted on loans worth 150 crore to Small Industries Development Bank of India (SIDBI) following a string of defaults to other lenders. The defaults have caused downgrades by credit Ratings Agencies CARE and ICRA. ICRA has downgraded non-convertible debentures (NCDs) of IL&FS worth 5,225 crore from AA+ to BB. It has also reduced the rating of IL&FS short term commercial paper from A4 to A1+. The downgrades have also affected IL&FS subsidiaries like IL&FS Transport and caused drastic falls in the NAVs of the best debt funds holding them. In some cases, the mutual funds affected have shut the gates to further inflows to prevent new investors from taking advantage of what may be a temporary dip in NAV.
Asset Management Companies (AMCs) including DSP Mutual Fund, Principal Mutual Fund, Motilal Oswal Mutual Fund and BOI Axa Mutual Funds have been hit. However reports suggest that some AMCs, such as BOI Axa Mutual Fund have not recorded drops in their NAV because they are not following a mark-to-market valuation approach for the affected holdings. A mark-to-market approach reduces the value of debt on a mutual fund’s books in case of a credit rating downgrade, even if there is no actual default. Not following this approach does not protect a fund, when an actual default occurs.
Specific schemes which have recorded drops in their NAVs including DSP Credit Risk Fund, Motilal Oswal Ultra Short Term Fund, Principal Cash Management Fund, Principal Ultra Short Term Fund, Principal Low Duration Fund and Principal Arbitrage Fund.
Principal Mutual Fund suspended inflows to Principal Cash Management Fund, Principal Ultra Short Term Fund, Principal Low Duration Fund and Principal Arbitrage Fund on 10th September. Motilal Oswal Mutual Fund has suspended inflows into Motilal Oswal Ultra Short Term Fund on 17th September. However Motilal Oswal CEO Aashish Sommaiyaa clarified in a tweet that the fund house expected repayment of IL&FS paper held by it which is due on 26th September and hence full recovery in NAV.
Date: 14 SEP 2018