IL&FS Default – Exposure in MFs and Impact

Its Back!

Right when the memories of JSPL were about to fade a new name is back. IL&FS that was on a ventilator from some time now has defaulted on Rs. 10 billion loan from SIDBI last week. It also defaulted on its short term borrowing which was later paid on August 31st. Following this ICRA and Moody has called for caution in Indian money markets which is expected to experience panic in the coming week. 

ICRA has downgraded IL&FS by nine notches to BB from AA+ citing extreme liquidity pressures. As per media reports the company is in process to raise Rs. 8,000 crore and is seeking immediate help from LIC and SBI who are existing stakeholder in the company. This could be a ray of hope for investors. 

Exposure in MFs:

As on August end 2018 following AMCs had exposure to IL&FS and its subsidiaries:

Exposure to IL&FS and Subsidiaries as on Aug 2018
AMC Fund Issuer Exposure in Cr.  % on NAV Total Exposure
Union MF Union Liquid Fund Infrastructure Leasing & Financial Services Ltd. 50 2.00% 99
IL & FS Securities Services Ltd 25 1.00%
IL & FS Securities Services Ltd. 25 0.99%
HSBC MF* HSBC Cash Fund IL & FS Financial Services Ltd 100 1.56% 204
IL & FS Financial Services Ltd. 79 1.24%
IL & FS Financial Services Ltd. 25 0.39%
LIC MF LIC Liquid Fund IL&FS Securities Services Ltd. 200 1.20% 697
IL&FS Securities Services Ltd. 199 1.20%
IL&FS Securities Services Ltd. 199 1.19%
IL&FS Securities Services Ltd. 99 0.60%
BOI AXA* BOI AXA Liquid Fund IL&FS Financial Services Limited (28/08/2018) 50 3.27% 129
BOI AXA Conservative Hybrid Fund IL&FS Financial Services Limited (28/08/2018) 5 2.11%
BOI AXA Credit Risk Fund IL&FS Financial Services Limited (28/08/2018) 75 4.52%
Principal MF* Principal Low Duration Fund IL&FS Financial Services Ltd.(24/09/2018) 3 0.51% 124
Principal Hybrid Equity Fund IL&FS Financial Services Ltd.(24/09/2018) 10 0.65%
Principal Cash Management Fund IL&FS Financial Services Ltd.(24/09/2018) 56 5.39%
Principal Cash Management Fund IL&FS Financial Services Ltd.(10/09/2018) 46 4.41%
Principal Ultra Short Term Fund IL&FS Financial Services Ltd.(10/09/2018) 4 3.94%
Principal Ultra Short Term Fund IL&FS Financial Services Ltd.(24/09/2018) 5 4.90%
Principal Arbitrage Fund IL&FS Financial Services Ltd.(24/09/2018) 0 3.82%
Mirae Asset* Mirae Cash Management Fund IL&FS Securities Services Limited (10/09/2018) 50 2.32% 50
DSP MF DSP Ultra Short Fund IL&FS Transportation Networks Limited – 23-03-2019 63 1.48% 629
DSP Credit Risk Fund IL&FS Transportation Networks Limited – 23-03-2019 221 3.21%
DSP Credit Risk Fund IL&FS Energy Development Company Limited – 7/06/2019 127 1.85%
DSP Credit Risk Fund IL&FS Energy Development Company Limited – 28-06-2019 97 1.41%
DSP Bond Fund IL&FS Transportation Networks Limited – 23-03-2019 13 1.89%
DSP Equity & Bond Fund IL&FS Transportation Networks Limited – 23-03-2019 56 0.77%
DSP Regular Savings Fund IL&FS Transportation Networks Limited – 23-03-2019 18 4.61%
DSP FMP Series – 195 IL&FS Transportation Networks Limited – 23-03-2019 6 9.94%
DSP FMP Series – 196 IL&FS Energy Development Company Limited – 28-06-2019 29 10.02%
Aditya Birla MF ABSL Credit Risk Fund 9.80% IL&FS Tamil Nadu Power Company Limited (14/03/2021) 170 2.04% 622
ABSL Medium Term Fund 9.80% IL&FS Tamil Nadu Power Company Limited (16/03/2020) 166 1.45%
ABSL Medium Term Fund 9.80% IL&FS Tamil Nadu Power Company Limited (14/03/2021) 71 0.62%
ABSL FTP – Series OW 9.80% IL&FS Tamil Nadu Power Company Limited (14/03/2021) 9 9.34%
ABSL MIP 25 9.80% IL&FS Tamil Nadu Power Company Limited (16/03/2020) 35 1.28%
ABSL CBF 9.80% IL&FS Tamil Nadu Power Company Limited (14/03/2021) 170 2.04%
UTI MF UTI CCF – Savings IL&FS Transportation Networks Limited 19 0.49% 38
UTI ULIP IL&FS Transportation Networks Limited 19 0.43%
Invesco MF Invesco Credit Risk Fund IL&FS Transportation Networks Limited 2019 (ZCB) 31.18 7.73% 31
Kotak MF* Kotak FMP – 194 IL&FS Transportation Networks Limited 18.68 8.52% 81
Kotak FMP – 193 IL&FS Transportation Networks Limited 12.45 5.01%
Kotak FMP – 192 IL&FS Transportation Networks Limited 7.47 3.14%
Kotak FMP – 183 IL&FS Transportation Networks Limited 42.34 7.38%
* Exposure as on July 2018. Numbers sourced from monthy portfolios of AMC websites. This may not be exhaustive list.

The MF industry has more than Rs. 2,700 crore exposure to IL&FS and its subsidiaries and while the parent has defualted and is downgraded there is  a risk of subsequent downgrades of its subsidiaries – IL&FS Transportation, IL&FS Tamilnadu Power, IL&FS Energy Development, IL&FS Security Services and IF&FS Financial Services. 

How does a downgrade or default impact the MF investors?

Such instances impact the NAV of the scheme. The impact on NAV can be on two occasions – Downgrade and Default.

In case of Downgrade: The impact of downgrade gets reflected in NAV immediately as post downgrade the bond yields are marked up and prices fall. 

Eg: XYZ company bond was AA+ rated and was trading at 10.5% as this bond gets downgraded to BB the yield will shot up to match the increased credit risk and will now trade at a much higher level. As yields go higher bond prices fall and this will reflect in the NAV of the scheme which hold this bond.

In case of Default: SEBI has laid down accounting practice for provisioning non-performing assets by MF schemes.

An asset will be classified as NPA if the interest and/or principal amount have not been received or remained outstanding for one quarter from the day such income/or installment was due. Also if interest is due beyond one quarter it is not included in the accrual income while calculating NAV of the scheme. Such NPA is marked down and written-off in phased manner by the MF.

Eg: XYZ bond’s interest payment is due on half-yearly basis on 30.06.2015 and the interest is not received till 1st quarter after the due date. The provisioning will be as follows:

10% Provision 01.01.2016 6 months past due date of nterest i.e. 3 months from the date of classification of the asset as NPA (01.10.2015)
20% provision 01.04.2016
20% provision 01.07.2016
25% provision 01.10.2016
25% provision 01.01.2017

As seen in the table within one and half years past the due date of the income the asset will be written off completely. If the company pay the due amount this can be added back to the NAV and this can give sudden gain in the NAV. AMCs can write-off more if they want to be conservative. 

For deep discount bond however, bonds can be classified as NPAs immediately if the rating of the bond comes down to BB and below. 

SEBI Chief recently cautioned MFs on their debt investments, he said, “Issue is in their books when they hold these debt instruments, either long term or short term, they have to be cautious of credit risk and how to value that on their books.”

What Should investors do with schemes that have exposure to IL&FS ?

Barring investors who are in liquid funds, retail investors in credit risk funds and other bond funds can remain invested if the AMC communicates ability to recover the principal and interest income. However, if recovery looks difficult investors can exit the scheme where exposures are very high and which will be ultimately written-off if the company defaults. Investors in schemes where exposure is over 4% and above are at risk of losing more and may take a call to exit such schemes. 

Schemes that have exposure to IL&FS subsidiaries may also come under pressure as these may also get downgraded soon as the rating was based on the guarantee from IL&FS. Take a wise call to exit them before these bonds are downgraded.

A detailed communication from such AMCs having exposure to IL&FS and its sunsidiaries shall help investor take appropriate call. 

Secret: The most efficiently run bank also has a NPA of over 1.25%, how can MFs live without NPAs on a lending book of over 12 lakh crore? Beware! 


6 thoughts on “IL&FS Default – Exposure in MFs and Impact

  1. Last lines are killer. I call them lenders to other planet. When all better organized and regulated entities has NPA, how these MF guys are reporting nothing downside. This lack of transparency and disclosure is giving bad feeling about their rhetoric ‘MF Sahi hai’. I must say Gandagi chupi hai, wake up time for regulators.


  2. IL&FS Securities Services Limited has already been sold to IndusInd Bank, no longer IL&FS group company. No impact on its Ratings.


  3. Nothing Nothing Nothing to say about AMFI & SEBI..
    Both are busy to help Banks, Non Banking Financial Institutions, PAYTM, PaisaBazaar, etc
    Promoting to sell MFs ,
    Thyr are not promoting the need of an Intermediators ( IFA,RIA) for investors in long term.
    Both have no time to maintain quality , transperancy in MF industry.
    Have no time to aware investors and Distributors about circumstances happening in future.


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