HDFC MF write-offWithin a month of its last markdown on Hazaribagh Ranchi Expressway Limited (HREL) exposure, the country’s largest fund house HDFC Mutual Fund has taken a fresh 13% markdown in Non-Convertible Debentures (NCDs) issued by the special purpose vehicle (a subsidiary of IL&FS Transportation Network Limited). With the extra 13%, the total markdown stands at 50%.

On January 24, 2019, HREL was downgraded to non-investment grade. Readers of RupeeIQ have already read here about how MF industry association AMFI has issued guidelines directing fund houses on the way they need to cut the value of sub-investment grade debt. Read on to know more about HDFC Mutual Fund’s latest action.

HREL exposure

As per reports, HDFC Mutual Fund earlier had an aggregate exposure of Rs 232 crore, through six debt oriented schemes, to NCDs issued by HREL. As on April 30, this exposure stands at Rs 116 crore. These funds are HDFC Banking and PSU Debt Fund (Rs 4.3 crore), HDFC Credit Risk Fund (Rs 21 crore), HDFC Dynamic Debt Fund (Rs 40.5 crore), HDFC FMP 1146D April 2018 (1) {Rs 5.3 crore}, HDFC Hybrid Debt Fund (Rs 20.5 crore) and HDFC Short Term Debt Fund (Rs 24.8 crore). The exposure amounts are as on April 30, 2019.

AMFI vide its communique dated April 30, 2019 shared the “Indicative Haircut Matrix” prepared/provided by valuation agencies (CRISIL and IMACS) in accordance with the Sebi circular dated March 22, 2019. Lowering the value of an investment is known as haircut in the financial world. A haircut leads to lower-than-market value placed on an asset,

In line with the AMFI communication on the indicative haircut matrix (wherein the standard haircut for senior secured securities rated as “D” in Infrastructure Sector is provided at 50%), the HDFC MF’s valuation committee after considering the earlier rating of IND D/CARE D, re-valued the NCD exposure to HREL from a markdown of 37% (on last prices provided by valuation agencies) to 50% (on the face value) on April 30, 2019.

The interest accrued till date of default has also been marked down at 50% and no further interest accrual is being done from the date of default. This is in line with the fund house’s earlier stance that it shall not be accruing interest on exposures in HREL going forward.

HDFC MF will continue to apply the haircut based on Indicative Haircut Matrix shared by AMFI, till the time the valuation agencies starts providing valuations for securities issued by HREL.

The fund-house will continue to monitor the developments around HREL and wants to keep investors informed about the same.

Additional read: HDFC MF Takes 12% More Markdown In IL&FS Entity Exposure, Reaching 37%

HREL problems

India Ratings has recently downgraded Hazaribagh Ranchi Expressway’s NCDs to ‘IND D(SO)’ from ‘IND C(SO)’. The downgrade follows the non-payment of the debt service obligations due on 12 April 2019 to the debenture holders.

HREL is a special purpose vehicle created by IL&FS Transportation Networks Limited for the purpose of designing, constructing and maintaining the four-lane Hazaribagh–Ranchi section of NH 33 in Jharkhand to 114km from 40.5km on a build-operate-transfer-annuity basis.

As per reports, on April 14, 2019, HREL failed to honour principal repayment of Rs 12 crore due to HDFC Short-Term Debt Fund, along with interest amount of Rs 10 crore due to all the six investee schemes of HDFC MF.

Fortunately, in none of the above six debt schemes is the HREL exposure too much. Hence, investors can heave a sigh of relief.

Check out all HDFC MF debt/fixed income schemes here.

HREL has been classified as ‘Amber Entity’ according to the National Company Law Appellate Tribunal order dated 12 February 2019, which defines ‘Amber Entities as Domestic Group Entities which are not able to meet all their obligations (financial and operational), but can meet only operational payment obligations and payment obligations to senior secured financial creditors’.

HDFC MF has earlier said that it continues to make legal representations at the NCLAT to lift the moratorium imposed on ‘Amber’ companies so that the investors’ interest is protected.

Additional read: UTI Mutual Fund cuts value of investment in Jorabat Shillong Expressway by another 25%

Disclaimer: The article is only for informational purposes. Investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on contact@rupeeiq.com