Is MF exposure to IndoStar Capital a cause for concern?
MF exposure to the company’s debt instruments amounts to ₹482 crore (as of July 2022), as per data from Ace MF
PremiumIndoStar Capital Finance, a non-banking financial firm (NBFC) which reported losses for the quarter ending 31 March, has over the past few weeks been generating negative buzz, particularly about its inability to continue as a going concern. The resignation of its chief financial officer Kapish Jain, barely two months after his joining the company, has only compounded this negative outlook.
Mutual fund exposure to the company’s debt instruments has been pegged at approximately ₹482 crore (as of July 2022), as per data from Ace MF. In the worst-case scenario of a default by IndoStar Capital, fund houses may be forced to write off the debt to an extent or side pocket—after segregating qualitative and risky instruments —the exposure to the instruments issued by the firm. This could impact the returns from your investment.
There are five debt MFs with more than 2% of their portfolio exposure to these instruments. These are Baroda BNP Paribas Low Duration Fund, PGIM India Low Duration , Baroda BNP Paribas Ultra Short Duration, SBI Magnum Income, and Franklin India Floating Rate Fund. Schemes from Baroda BNP Paribas have invested in the commercial papers issued by the NBFC, while others have exposure to corporate debt papers—albeit those with maturity in 2022 or 2023..
In terms of investment in absolute terms, schemes having more than ₹50 crore exposure to IndoStar’s debt papers (either floating rate or corporate debt papers) include Axis Ultra Short-Term Fund, SBI Magnum Medium Duration, and ABSL Low Duration Fund.
The commercial papers are rated A1+, the highest rating for the short-term papers, and the corporate debt papers are rated AA-, which are below the highest AAA rating, by CareEdge Ratings. Note that these instruments haven’t been de-rated in the past three financial years. IndoStar Capital, a vehicle loan financier, posted a net loss of ₹754 crore in the March quarter against a net loss of ₹317 crore logged in the same period last year. Its results for the March quarter were delayed due to an audit review. The company’s auditor pointed out that its total liabilities exceed the total assets maturing within 12 months by ₹2,206 crore as of 31 March 2022, and stated that there is a material uncertainty that may cast significant doubt on its ability to continue as a going concern.
For this observation, the company responded that it has raised incremental funds to the tune of ₹1,170 crore, based on support from promoters. It also stated that the management has plans to raise additional financing through monetization of a portion of its holding in its 100% subsidiary lndoStar Home Finance.
Referring to this and Indostar’s high capital adequacy and decent debt to equity ratios, a spokesperson from one of the MF houses said they are, for now, confident that the debt default by the company is unlikely and that they will wait for the results for the quarter ending June 2022 to take a call on the investment exposure. The results are expected to be out next week.
Most fund houses mentioned above are understood to have participated in the buyback offer announced by the company for its debt papers. The details of the instrument on offer, price and time period of cash flows are not available.
An industry source said the company will return the entire money it owes the fund houses. Financial experts have taken a similar stance. Dilshad Billimoria from Dilzer Consultants, a Sebi registered investment advisor, said, “investors can wait till the Q1 results are out as the financial performance of the company will be much clearer. Investors can also look out for the cash position held by these schemes so that there will be no negative impact —similar to the one we experienced in the case of Franklin Templeton— in case of any redemption amount from these funds."
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