There is finally some respite for debt fund investors stuck with bad securities.
HDFC Asset Management Company (AMC) has decided to acquire the non-convertible debentures (NCDs) of two of Essel group companies—Edisons Infrapower & Multiventures and Sprit Infrapower & Multiventures—in its books through its fixed maturity plans (FMP) that had invested in them. The fund house said in a filing to the stock exchanges that it would buy these scrips from its mutual fund's FMPs and pay off its investors.
In 2016, Franklin Templeton India AMC had bought the troubled Jindal Steel and Power Ltd's debt securities from its debt schemes after these papers were downgraded twice earlier that year.
Not for the first time
To be sure, the Indian mutual fund industry has seen many such instances of fund houses taking over bad papers on their books.
In January 2019, when Essel Group declared its inability to repay many of its lenders, many mutual funds that had held these securities entered into an agreement with Essel promoters, giving them respite till September 2019 for repaying their debt. Meanwhile, two FMPs of HDFC AMC and one FMP belonging to Kotak Mahindra AMC matured in the month of May.
But, due to the agreement, the fund houses whose FMPs had matured couldn’t do much in the interim and passed on the losses to the investors as the schemes had already matured. In other words, these schemes sold the remaining assets, except the Essel Group securities, and repaid their investors. The amount that was to have been recovered from the Essel group was kept in abeyance because there was leeway till September 2019. The fund houses found it suitable to wait till September, by which time they had hoped to recover their dues and pay off investors.
Of the two HDFC FMPs, one got rolled over, while the other got redeemed, but without the amount that Essel was supposed to repay.
Limited benefits of rolling over
Further, HDFC AMC has a few more FMPs lined up for maturity before September 2019. Now, instead of waiting till September 2019 to recover its money, HDFC AMC has decided to compensate its investors. The AMC has decided to buy the securities from the FMPs at market price. The FMPs can either repay their investors (of the FMP that had got redeemed) or credit the amount to the FMP that got rolled over.
The fund house has agreed to buy the securities from only those funds that either matured or will mature before September 2019. For those schemes that mature after September 2019, the fund house will wait till the agreement plays out.
Also, the fund house has stated that it would not buy all the bonds outright. For FMPs that have already matured, the AMC would buy the bonds now and pay off their investors. But for those FMPs that are due to mature between now and September, it would buy the bonds on their respective maturity dates at the prevailing valuation.
"The only contentious point is they talk about a valuation of bond on maturity date; not sure if that means there could be a slightly lower valuation than the actual value of the bond. That will be worth finding out," said Kaustubh Belapurkar, Director, fund research, Morningstar India, a US-headquartered MF tracking and research firm.
A senior industry official privy to the matter told us that investors are likely to get almost as much as they invested in these FMPs in the first place. The January 2019 deal between the mutual fund industry and Essel group promoters was considered as an extension of the payments schedule, and not as a default. That’s why rating agencies did not downgrade the Essel group scrips at that time.
In its 31 January 2019 note following the fall in Zee Group companies' share prices, Brickwork Ratings (BWR) had said that it "takes comfort from the reported agreement with lenders that there will not be any event of default declared due to steep fall in price. BWR further takes comfort from stated intent of speedy resolution through a strategic sale of ZEEL (Zee Entertainment Enterprises) in a time-bound manner. The proceeds of such stake sale are stated to be used for repayment of debt against pledge of shares at group Level… the operating and financial performance of ZEEL, the flagship company of the group, continues to remain satisfactory and the promoters have announced their plans to demonetize part of their stake for repayments of dues including those which have raised debt by pledge of shares." So far, BWR has not received any intimation of default.
However, subsequently, and in the last two months, Brickwork Ratings has downgraded both these NCDs with the latest downgrades coming in as recently as 13 June. It would indeed be interesting to note the values at which the AMC has taken over these scrips, and how much HDFC MF investors would eventually recover. In the gloom surrounding debt funds, HDFC AMC's actions have provided some relief to investors.
What happens to HDFC AMC shareholders is another matter altogether.