In yet another episode of mutual funds being hit by debt downgrades and defaults, HDFC Mutual Fund has written down its exposure to Simplex Infrastructures, a company enganged in Engineering Procurement Construction (EPC) and turnkey projects for civil construction. The paper was present in HDFC Credit Risk Fund but constituted a relatively modest 0.73% of assets on the date of the downgrade or ₹124.11 crore. HDFC Credit Risk Fund has a large AUM of 14,625 crore (as of 31st October 2019). As per data from Rupeevest, other mutual funds did not have exposure to Simplex Infrastructure (as of 31st October).
On 26th November, CARE Ratings downgraded bank facilities worth ₹10,500 crore and NCDs worth 495 crore issued by Simplex from BBB to BB+. The ratings agency cited lack of infusion of equity capital by the promoters, moderation of profitability, deterioration of working capital cycle and stretched liquidity as reasons for the downgrade. A downgrade below BBB takes debt below investment grade and necessitates a write-down as per a matrix issued by the Association of Mutual Funds of India (Amfi).
Credit Risk Funds have been in the eye of the storm in India’s ongoing debt crisis. The category witnessed outflows of ₹1,381 crore in October 2019 continuing a trend of outflows that has been in existence for most of FY 19-20.