On 4th October 2019, Brickwork Ratings downgraded Spirit Infrapower and Multiventures, an Essel Group company. Several funds of Aditya Birla Sun Life AMC hold Non-Convertible Debentures issued by Spirit and hence saw cuts in their NAV. Over the past week Aditya Birla Medium Term Plan is down 2.07%, Aditya Birla Sun Life Dynamic Bond fund is down 1.89% and Aditya Birla Sun Life Credit Risk Fund is down 1.06%.

Brickwork Ratings downgraded NCDs of Spirit Infrapower worth around 111 crore to D (Default). However it cut the ratings of NCDs worth 853 crore to BB-. These latter NCDs are held by Aditya Birla Sun Life Mutual Fund. As per the valuation matrix issued by the Association of Mutual Funds of India (AMFI), such a cut requires the schemes holding the paper to take a 25% write down, which Aditya Birla Mutual Fund has taken in the three affected schemes.

The 3 affected schemes had exposures of 6-11% to Spirit Infrapower at end of August 2019. However in September 2019, the Essel group repaid half the debt owed to lenders including mutual funds after receiving money from Invesco Oppenheimer, an international fund which increased its stake in the group. It is unclear how much the current exposure is because the latest fund factsheet has not been released by Aditya Birla Sun Life Mutual Fund. However based on the NAV reductions seen, Mint estimates the exposure to be in the 4-8% range. A person with knowledge of the matter who declined to be named stated that the current exposure is 3.32% in Aditya Birla Sun Life Credit Risk Fund, 5.80% in Aditya Birla Sun Life Dynamic Bond Fund and 5% in Aditya Birla Sun Life Medium Term Plan.

The Essel exposure is also backed by shares of Zee Entertainment Enterprises as collateral. These shares have seen a precipitous drop over the past year (down around 40%). “Our cover is close to 1 time. Currently we are fully covered," said A Balasubramanian, CEO, Aditya Birla Sun Life Mutual Fund.

Mint had recommended an exit to investors in the affected schemes in July and we reiterate our recommendation. Debt fund investors should not be taking equity-like risks and this is precisely the position of scheme investors in this case. However investors should be mindful of any exit load or tax applicable. They will also lose out in any future recovery in the concerned debt. Gains in debt funds are taxed at slab rate if the fund is held for less than 3 years. After this period they are taxed at 20% and the benefit of indexation is given. Amol Joshi, founder, Plan Rupee Investment Services, called for a more nuanced approach. “There has been some recovery in bad debt. Recently an ILFS group company was upgraded from amber to green and resumed payments on its debt. Half the money has come to the funds in Essel. Hence, investors who have a year or more to go for the goal they want to achieve with this fund should stay put and so should investors who have not completed 3 years. Other can consider an exit especially if they are near their goal based redemption date," he said.

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