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Credit-quality issues in debt instruments continue to haunt the mutual fund industry. The latest episode concerns bonds issued by Altico Capital. The company defaulted on interest payments of around ₹ 20 crore on external commercial borrowing (ECB) that was due to Dubai-based Mashreq Bank. This prompted the rating agencies to downgrade Altico’s bonds to below-investment grade.
Fourteen debt mutual funds — including fixed maturity plans (FMPs) from UTI and Reliance AMCs — that held the non-convertible debentures (NCDs) issued by Altico took a hit of up to 8 per cent in their NAV in a single day. According to ACE MF, a mutual fund research application, these schemes’ investments in NCDs issued by Altico amounted to around ₹538 crore (as of August 2019).
Segregation of portfolio
On the day of the default (September 12), rating agency CARE downgraded the NCDs from AA- to the below-investment grade of B. Since the security has been downgraded to below-investment grade, mutual funds having these distressed assets in their portfolio have marked down the value of these bonds.
On September 13, India Ratings and Research downgraded the long-term issuer rating of Altico to D.
UTI MF has a combined exposure of ₹334 crore to these NCDs across seven schemes. Of these, UTI Credit Risk Fund holds ₹201 crore, while the rest is in six UTI FMPs. The NAV of UTI Credit Risk Fund was marked down by around 5.7 per cent, while the NAVs of the six FMPs were marked down by 6-8 per cent.
Subsequently, on September 13, UTI AMC announced creation of a segregated portfolio (also called side-pocketing) in UTI Credit Risk Fund for the distressed assets. The side-pocketing option is limited to open-ended schemes; such a provision is not available in the six FMPs.
Delay in side-pocketing
Eight schemes from Reliance Mutual Fund — Reliance Ultra Short Duration Fund and seven FMPs — have a combined exposure of ₹204 crore to the distressed Altico NCDs. In a press release, Reliance AMC reported that it would create a segregated portfolio of securities of Altico held in Reliance Ultra Short Duration Fund immediately after the expiry of the mandatory load-free exit period of 30 days.
This is because, recently, SEBI came out with a regulation that mandates all AMCs to get approval from their trustees for enabling the provision of a segregated portfolio in their open-ended schemes. After the approval, the AMCs should provide unit-holders the option of exiting the scheme within 30 days without exit load.
In this case, Reliance AMC got approval from its trustees for creation of a segregated portfolio; the mandatory load-free exit period ends on September 24. So the side- pocketing in the Reliance fund will be done on September 25. Till then, all ongoing subscriptions in this fund have been suspended.
Reliance Ultra Short Duration Fund held more than ₹ 150 crore in Altico NCDs, and marked its NAV down by 4 per cent. The NAVs of the seven Reliance FMPs were marked down by 1-7.4 per cent.
What for investors
Money recovered from Altico, whether partial or full, will be distributed to investors in proportion to their holding in the segregated portfolio. No subscription and redemption will be allowed in the segregated portfolio of the captioned schemes.
However, these schemes with segregated portfolio will be listed in the exchanges. The unitholders may exit through the secondary market route. However, liquidity would be an issue in the exchanges.
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