Kotak AMC did not specify how it will pay off its unitholders the money it would realise around its maturity (8 April; as per Value Research) and how it would segregate- and at what net asset value- the troubled debt securities.
In a written communication to investors of Kotak FMP Series 127 that matured on April 8, Kotak Mahindra Asset Management Co said that it may not be able to pay the entire redemption amount to its investors.
The scheme said it may face a delay in recovering its money that it had invested in the non-convertible debentures (NCD) of two of Essel group companies, namely Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd.
As a result, investors of this scheme have got most of their monies back, but are yet to get some portion that is stuck in the two instruments, Kotak AMC said.
The FMP was launched around November 2015.
Although the NCDs are backed by equity shares of Zee Entertainment Enterprises Limited (Zee), most of the lenders and mutual funds who had lent money (in other words, bought the debt securities) to the Essel group had chosen to not sell the shares to recover the money if there is any default.
Lenders have granted this moratorium till around September 2019 by which time they, including Kotak AMC, expect the group to repay all its dues.
In a communication to Moneycontrol, Rohit Rao, Chief Communication Officer, Kotak Mahindra Group said: “The 3- year FMP scheme, which matures in April-May 2019, has invested in debt securities, money market instruments and government securities. Amongst other investments, the scheme also invested in Non-Convertible Debentures (NCDs) issued by Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd (both are Essel Group companies – secured by equity shares of Zee Entertainment Enterprises Limited) and IL&FS Transportation Networks Limited (Credit Enhancement by Parent Support Agreement of IL&FS). The three firms are facing headwinds due to company and sectoral-specific issues. We are working closely with the Essel Group for optimal recovery from Konti & Edisons for the benefit of our unit holders and believe that such recovery will take place albeit with some delay. For IL&FS Transportation Networks, Kotak Mutual Fund has made a 100% provision for this investment as the company has been classified in the Red category where recovery is uncertain and will be dependent on the resolution plan achieved by the new board/NCLT.”
NCDs or debt securities that are backed by the group companies’ equity shares come with a cover that is agreed upon at the time of agreement.
For instance, Kotak AMC had lent money to the two Essel Group companies for a minimum share cover of 1.50 times. In other words, if the fund house lends (or in other words, invests) Rs 100, the security is covered by equity shares worth Rs 150 of the borrower group company. If the cover falls below this mark, the lender- that is the mutual fund- is free to sell the shares and recover its money. Or it can ask for more shares to reinstate the cover.
On January 25, shares of Zee Entertainment Enterprises (ZEEL) fell 26% and those of Dish TV India fell nearly 33%.
According to data by Morningstar, a total of 10 fund houses had lent to 16 companies belonging to Essel Group. Some of this money lent was backed by shares of the above companies that were pledged.
“This has resulted in breach of top-up covenants…there were lot of deliberations with the promoters of the Essel Group along with other lenders (Mutual Funds, NBFCs etc). Super majority of lenders have decided not to declare event of default as it may result in steep fall in price given panic selling in the Zee thereby eroding collateral value and resulting in sub-optimal recovery,” said the note by Kotak AMC to its investors.
The fund house added that “Essel promoters are working for resolution of above through a strategic sale of Zee in a time bound manner. The above resolution is likely to be achieved by September 30, 2019 as per communication from Essel promoters.”
Meanwhile, the FMP has matured. Rao of Kotak Mahindra AMC told us that the scheme has sold off all its other securities and paid off its investors already. "Only the investment in Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd, which are backed by the pledge of Zee Entertainment Enterprises Limited shares, aren't realized", he said. Rao added that "the Essel Group companies i.e. Edisons Utility Works Pvt Ltd and Konti Infrapower & Multiventures Pvt Ltd have asked for an extension of time to repay their dues" and not yet defaulted. "The majority of lenders i.e. from mutual funds, NBFCs and overseas lenders have come together to provide an orderly repayment of dues by Zee promoters. We have taken various measures to ensure that our unit holders are protected and are making every attempt to ensure that our dues are recovered", says Rao.Being a closed-end fund, Rao tells us that side-pocketing is not required for FMPs as these are closed-end schemes and there are no continuous inflows. Whatever money a closed-end fund realises on maturity gets paid to investors. Any amount realised later gets distributed to investors as and the monies come.