Aditya Birla Sun Life MF Debt Investors Face Cliff Risk

In a possible resumption of the DHFL episode, the large open-ended debt programs of Aditya Birla Sun Life Asset Management Co. (ABSL AMC) saw a sharp increase in their percentage of exposure to Essel Group paper, leaving investors exposed to great losses in the event of default. In the case of DHFL Pramerica Mutual Fund, exposures from 7.5% to 8.5% to DHFL in mid-2018 exploded to 30% to 53% in May 2019 due to large outflows from the schemes concerned, the investors who fled before defaults occurred and the fund house had to sell the most liquid part of the portfolio to deal with redemptions. As a result, investors remaining in the programs were hit hard when DHFL defaulted. On June 5, DHFL Pramerica Medium Term Fund had to write down 53% of its value, which was unheard of in the mutual fund industry. Similar exits from three ABSL AMC programs – Aditya Birla Sun Life Medium Term Fund, Aditya Birla Sun Life Credit Risk Fund and Aditya Birla Sun Life Dynamic Bond Fund – increased their exposure to the struggling Essel group. This could well lead to a similar result.

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In January 2019, a consortium of Essel group lenders, including mutual funds, agreed to wait until September 30, giving it time to raise funds for loan repayment. The lenders have agreed not to assert their guarantees against the debt of the Essel group; for several mutual funds, these guarantees are actions of the promoter in the companies of the Essel group, including Zee Entertainment Enterprises Ltd. Mutual funds have an exposure of approximately ??7,000 crore in the debt of the Essel group, at the end of February 2019, according to data from Value Research. Some AMCs, including Reliance Nippon Life Asset Management Co., have since disappeared. But Essel’s promoters have failed to raise enough money to pay off lenders in seven months, and with just two months to go, lenders now find themselves on the brink.

However, a person close to ABSL AMC said the sale of the promoter’s stake to Essel was underway and was being closely watched by lenders. He expressed his full confidence that the sale of the stake will be completed before the September 30 deadline. He added that the promoter’s debt is only 0.8 times the value of the promoter’s stake in Essel Group and therefore all creditors can be fully repaid. ABSL AMC declined to comment on the matter.

Overall, Essel Group’s mutual fund exposure is partly in fixed-term plans (FMP) and partly in open-ended funds. FMP investors cannot exit programs due to mandatory lockdowns. However, the inability to exit kept the percentage of distressed debt exposure constant in RMPs.

In open-ended funds, investors have the option of exiting and many have exercised it in the three ABSL programs concerned. As the concerned fund managers sold more securities to meet the repayment, the size of Essel’s debt in their portfolios exploded. Exposures from 8% to 12% in December 2018 increased to 12% to 17%, putting current investors at risk.

The ABSL programs are exhibited at two companies in the Essel group — Spirit Infrapower and Multiventures Pvt. Ltd and Adlink Infra and Multritrading Pvt. Ltd. The papers issued by Spirit are rated BBB by Brickwork Ratings and the Adlik papers are unrated. The Spirit paper’s rating was Brickwork A (SO) in December 2018 and was downgraded a notch to Brickwork BBB (SO) in May 2019. ABSL programs are only rated by Brickwork, in accordance with the monthly portfolio disclosure of AMC. In total, the value at which the ABSL regimes marked the two papers has not changed much since December 2018. The value amounts to ??2,513 crore at the end of June 2019, which is just 5% less than their combined value of ??2,657 crores in December 2018.

The person mentioned earlier said that only a 10-15% depreciation of the papers was considered. Further exits from the three regimes may lead to an increase in their exposure to troubled paper. He also reported that the security coverage (value of securities) is still around 1.2 times the exposure to Essel, despite the Zee Entertainment share price falling, which fell 29% over the past year. past year.

However, mutual funds, including ABSL AMC, which are signatories to the consortium, face a dilemma: leaving the Essel group by selling pledged shares in Zee Entertainment will reduce their risk, but a simultaneous exit of all lenders will result in a fall in the share price. well below the value of debt held by lenders. “Even if the developer manages to repay the lenders, the papers could be canceled in the interim due to Sebi’s disapproval of the standstill agreement,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors.

What should you do

Various people with knowledge of the matter have expressed confidence that the debt will be repaid through the sale of the Essel promoter’s stake. If the money is paid back in full, investors might consider a 10-15% hike in troubled paper. How does this translate? With Essel papers constituting 17% of plan assets in the case of the Aditya Birla Sun Life fund over the medium term, the increase would be around 2.5% at best. Similar results are likely for the other two regimes. The person having knowledge of the matter mentioned that in addition a percentage of the profit made by the promoter on the sale of participation will go to the lenders in the form of a coupon. However, it is not known how much this additional amount will be. On the other hand, investors could lose up to 11-17% in the affected regimes. If they stay put and the percentage of exposure to Essel increases, the loss may increase.

Looking at the numbers, it makes sense to come out. “We recommended an exit in a note to investors six months ago,” said Prateek Pant, co-founder and chief product officer at Sanctum Wealth Management. “Exposures have worsened since then due to large-scale buybacks and there has been hardly any write-offs so far. Investors who remain in the affected programs take a significant event risk,” he said. -he declares.

Before going out, “consider the tax and exit burden,” Dhawan said. Debt funds are taxed at the slab rate if they are held for less than three years and at 20% with indexation if they are held longer.

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Carol M. Barragan