In This Issue:
- Editor’s Column – IL&FS will have a contagion effect with high repercussions
- ABSL Credit Risk Fund – Portfolio Analysis
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – IL&FS will have a contagion effect with high repercussions
The debt default by IL&FS cannot be ringfenced with the lenders taking the hit, as in the case of banks bad loans. The public has a direct stake in IL&FS debt, as MFs have invested in the debt and the default has hit public investors in MF schemes that have been affected by the default. More importantly, IL&FS was seen as a highest safety asset, given its highest safety rating by rating agencies before it was downgraded to default status in just a matter of a few months,
The IL&FS default has unnerved investors who are looking suspiciously at all debt securities held by MFs, whether they are rated AAA or BBB. MFs were receiving good flows into their credit risk funds that were deployed in lower rated assets, and flows into credit funds will stop going forward. The effect of lack of flows into credit funds is higher cost of borrowing for issuers especially at the lower end of the rating scale, which will drive credit spreads higher, which in turn will cause NAVs of credit risk funds to fall leading to further hits for investors.
Apart from credit risk funds, IL&FS debt was held across other fixed income funds and this will cause more risk aversion for investors in fixed income mutual funds. MFs are the largest lenders in the CP market and if there is lack of liquidity amongst MFs, working capital for companies may dry up if MFs go slow in CP investments. Corporate bond market too will take a hit given that most of MFs fixed income corpus is deployed in corporate bonds.
Issuers will tehn have to pay higher cost for borrowings, leading to lowering of profitability and postponment of capex, which in turn could hit equity markets.
IL&FS rating was further downgraded to D by ICRA, as per ICRA report, IL&FS was unable to meet the commercial paper redemption obligations due on 14th September 2018. Furthermore, on 15th September 2018, IL&FS reported that it had received notices for delays and defaults in servicing some of the inter corporate deposits (ICD) accepted by the company. (Click here to Read about IL&FS Downgrade and its effects)
IL&FS and its subsidiaries are in need of financial assistance, and its major shareholder LIC is not ready to provide the financial support as IL&FS has no concrete plan for debt reduction. This has forced IL&FS to knock on the doors of the central government for support, if the government rejects IL&FS plea then IL&FS will have to monetize or sell its asset to repay the debt.
According to the annual report, as of 31 March, IL&FS total outstanding loans stood at Rs. 910.91 billion. This is about 14% more than its fiscal 2017 end borrowings outstanding at Rs 800.17 billion. Most of the debts are arising from loans given to the group subsidiaries, IL&FS has 24 direct and 135 indirect subsidiaries. Of the total outstanding debt, Rs 573.22 billion is in bank loans. According to a Nomura report, IL&FS Transport Network, the holding firm of the group road assets, alone has a consolidated debt of Rs. 350 billion while IL&FS Financial Services has Rs 170 billion of debt.
Fund Raising Plan– On 29th August the IL&FS board had approved a rights issue of 300 million equity shares at Rs 150 per share aggregating to Rs 45 billion to shore up its capital. The process would be completed by 30th October 2018. The Board also approved the specific asset divestment plan. IL&FS is also expected to sell its corporate headquarters in Mumbai BKC to raise funds. It is expected to fetch around Rs 13-15 billion.
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ABSL Credit Risk Fund – Portfolio Analysis
ABSL credit risk fund portfolio is diversified through 11 sectors but 88.7% of fund holdings are in 6 sectors. The finance sector has 41.63% weight in the total portfolio (Financial sector includes Banks, Microfinance, HFCs, Holding Companies ). Apart from the financial sector, construction has second highest weight followed by power, Infra, and Retail sectors. Construction has 16.8% weight, Power has 10.13% and Infra has 8.12% weight in the portfolio.
Fund holds 48 papers from the financial sector, the majority of papers are from the NBFC companies or private banks, which is positive as most of the PSU banks are under PCA, and all PSU banks are still struggling with NPAs. Private lenders are witnessing rating upgrades and will improve the credit quality of the portfolio. (Click here to Read in detail about NBFC Sector)
Construction sector includes building construction and real estate companies, the outlook for the construction sector is improving as the government has taken several initiatives to encourage the development in this sector. Implementation of RERA & GST will make this sector more transparent and streamlined, which will improve the consumer & investor sentiment. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. SEBI has given its approval for the Real Estate Investment Trust (REIT) platform, which will help in allowing all kinds of investors to invest in the Indian real estate market.
In the power sector, the fund holds distribution, transmission, generation and renewable energy companies NCDs. ABSL credit risk fund holds 3.76% in UP Power Corporation, which is in power distribution space, but UPPCL NCDs is backed by the UP Government. Going forward, Ujwal Discom Assurance Yojana (UDAY Bonds) will gradually improve the financial conditions of state-owned distribution companies. (Click here to Read about UDAY Bonds).
ABSL credit risk fund portfolio has 39.91% of bonds with higher credit ratings (AA and above) while 55.68% of bonds are lower rated. The fund holds 10.89% in Un-rated instruments.
ABSL credit risk fund holds Annapurna Microfinance Private Limited, Piramal Capital & Housing Finance Limited, Spandana Sphoorty Financial Limited, Tata Capital Financial Services Limited, Tata Capital Limited whose credit rating was upgraded recently.
Assetz Value Homes North Pvt Limited, IL & FS Education and Technology Services Limited, IL&FS Tamil Nadu Power Company Limited and Syndicate Bank credit rating was downgraded recently.
Expese Ratio- 0.68% (direct plan), 1.68% (regular plan).
Yield to Maturity- 10.50%
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