A passenger sits below an advertisement for the Mutual Funds Sahi Hai campaign by the Association of Mutual Funds in India (AMFI) at a bus stop in Mumbai.(Photographer: Dhiraj Singh/Bloomberg)

ICRA Places Six Mutual Fund Schemes Under Rating Watch Over IL&FS Exposure

ICRA Ltd. placed six mutual fund schemes under “rating watch with negative implications” for their exposure to serial defaulter IL&FS group after its two operating arms sought a refund of debt payments.

The schemes under watch are: HDFC’s and UTI’s banking and PSU debt funds, UTI’s bond and dynamic bond fund, HDFC’s short-term debt fund and Aditya Birla Sun Life’s short-term opportunities fund.

The rating action takes into account the deterioration in the credit quality of the underlying investments of these schemes driven by their exposure to special purpose vehicles of Infrastructure Leasing & Financial Services Ltd., ICRA said. The agency would continue to monitor the portfolios of the schemes and take an appropriate action, when required.

Jharkhand Road Projects Implementation Company Ltd. and the West Gujarat Expressway Ltd., two special purpose vehicles of IL&FS, have sent letters to trustees demanding a refund of debt payments made after Oct. 15. India Ratings said that appears to be based on a legal interpretation that the repayment moratorium granted by the National Company Law Appellate Tribunal applies to the group’s all 348 companies.

ICRA, in its report, said the default risks by various SPVs of IL&FS has increased after the communication. “Despite a ring-fenced structure and adequate cash flows to service the debt obligations, the SPVs have asked the trustees to stop debiting the SPVs escrow account towards future obligations.”

The ratings of SPVs are likely to be downgraded in case of a delay in honouring their obligations, ICRA said. That would impact the credit score of the mutual fund schemes having exposure to the SPVs, it said.

Also read: Serial Defaulter IL&FS in Spotlight as Bond Payment Due