BOI Axa Credit Risk Fund is the latest mutual fund to take a hit from the ongoing crisis in IL&FS debt repayment saga. The fund’s NAV has fallen by about 1.5% overnight on Monday, 17th September. The fund has 6.13% of its corpus in the IL&FS commercial paper. It also has 3.42% of its assets in debt issued by Kwality Ltd., a holding which has also raised concerns on social media. The Kwality Ltd. paper is not rated by any credit ratings agency at present.
As written here, other debt funds have also taken a hit as a result of the IL&FS crisis. Thirteen AMCs have debt exposure of around Rs 2,900 crore, according to a report in Value Research, but not all AMCs follow a mark-to-market approach and hence they have not all taken immediate hits to their NAVs. Whilst credit risk is to some extent accepted in credit risk funds, even ordinary debt funds like liquid and ultra short-term funds have been hit. Credit risk funds are mandated to hold at least 65% of their assets in debt rated below AA+.
DSP Credit Risk Fund was among the first to show a drop in NAV due to an exposure to both IL&FS Transport and IL&FS Energy Development. You can find the details here. Principal Mutual Fund also saw a decline in multiple debt funds and announced a suspension of fresh inflows into Principal Cash Management Fund, Principal Ultra Short Term Fund, Principal Low Duration Fund and Principal Arbitrage Fund. Motilal Oswal Ultra Short Term was also hit and it halted fresh inflows as well.
What is the IL&FS Crisis?
IL&FS is an infrastructure developer, founded in 1987 by Central Bank of India, HDFC and UTI. Currently, LIC is its largest shareholder with a 25.3% stake and SBI also holds 6.42% stake. ORIX Corp of Japan has another 23.5% and the Abu Dhabi Investment Authority holds 12.6% in IL&FS. In the last four years, the consolidated net profit of the IL&FS group went from positive Rs 80 crore to negative Rs 2,000 crore (a loss). The consolidated liabilities of the group soared from about Rs 68,000 crore in FY 15 to Rs 99,950 crore in FY 18. The group has only Rs 7,400 in equity.
IL&FS has several subsidiaries such as IL&FS Transport, IL&FS Energy Development etc. Following defaults to various lenders, including a default of Rs 250 crore to SIDBI (Small Industries Development Bank of India), the IL&FS debt was downgraded by ICRA and CARE. News reports have pointed to ongoing discussions with LIC, the largest shareholder in IL&FS for a rescue package of Rs 4,000 crore. However, no concrete plan has been announced, as of now.