Exposure of over Rs 1,300 cr to IL&FS, Essel worries fixed maturity plans

44 such plans are set to mature by June 2020

The mutual fund (MF) industry’s troubles with stressed groups could remain for now, with 44 fixed maturity plans (FMPs) exposed to groups such as Essel and Infrastructure Leasing and Financial Services (IL&FS) maturing by the June quarter next year. 

According to experts, the repayment concerns are more around the Essel and IL&FS groups as compared to other stressed groups. These FMPs have Rs 1,300 crore of exposure to these groups’ entities.

“MFs have not yet fully provided for all entities related to the IL&FS group. In addition, no markdown has been taken on Essel group exposures given that the MFs expect a recovery,” said Vidya Bala, head of MF research at FundsIndia.  

If exposure to Dewan Housing Finance (DHFL) group and the Anil Ambani group is taken into account, then the exposure of FMPs’ stands at Rs 1,600 crore. Further, the number of FMPs goes up to 79. According to analysts, in the event of rating downgrades on account of payment delay or weakening fundamentals of these group entities, investors in FMPs and other debt schemes will be at the receiving end. 

“Outside FMPs as well, MFs have large exposures to these groups, of Rs 18,100 crore. In case of downgrades, there could be markdowns in these schemes, resulting in investors seeing losses on their investments,” said Credit Suisse analysts in a recent note. 

Essel group accounts for 80 per cent of exposure of FMPs maturing by June next year. The second-largest group in terms of exposure of FMPs is the DHFL group (Rs  262 crore). This is followed by IL&FS (Rs 6 crore) and Anil Ambani group (Rs 9 crore), according to data from Value Research. 

MFs could face a difficult test even in the current quarter. “A large share (56 per cent) of exposure to the stressed groups will be maturing by June 2019,” analysts at Credit Suisse added. 

The overall exposure of debt schemes to these stressed groups stands at above Rs 17,000 crore. The largest exposure is towards DHFL (Rs 7,427 crore), followed by Essel group (Rs 7,427 crore) and Anil Ambani group (Rs 2,058 crore), according to data from Value Research. The balance is in IL&FS group. Besides risk of markdowns, experts say debt schemes exposed to the stressed papers could face concentration risks.

“If there are heavy redemptions, open-ended schemes’ concentration towards stressed papers related to IL&FS or Essel entities could go up,” Bala added.

“Fund managers typically end up selling liquid assets to meet redemption pressures,” said a fund manager, requesting anonymity.

Earlier in the month, Kotak MF and HDFC MF were unable to pay the expected amount to FMP investors on maturity, on account of exposures to Essel group. 

However, an industry official said that FMP investors are still better-placed than investors in the open-ended schemes. 

Another fund manager said, “Investors in FMPs or close-ended schemes could get the benefit of future recovery, due to its inherent structure. However, those in open-ended schemes are less likely to see recoveries after a debt paper is downgraded owing to repayment challenges.”  

According to people in the know, the Securities and Exchange Board of India (Sebi) is keeping a close eye on the situation and could tighten norms to prevent MFs from taking undue risks in their debt portfolios. 

The regulator could even direct MFs to be more mindful when taking exposures to promoter groups or entities where the leverage and pledging is already high, sources suggest.