The fallout of the Infrastructure Leasing and Financial Services Ltd (IL&FS) and Essel Group crisis still continues to be felt for investors. In the latest, some fixed maturity plans (FMPs) by Kotak Mahindra Asset Management Company have returned lower than expected money to their investors on maturity, owing to their exposure to some companies from IL&FS and Essel.
Let's take the case of the Kotak FMP Series 183.
FMP Case Study
Invest as on December 2015: Rs 100.
Maturity: April 2019.
Returned on Maturity: Rs 100 (Principal) + Rs 8 (Partial Interest).
Not Returned to Investors on Maturity: Rs 20 (Partial Interest, Pending Resolution).
Here, Kotak Mahindra AMC's exposure to IL&FS Transportation Networks Limited (ITNL), the road development arm of IL&FS Group, was 7.37 percent of assets under management (AUM) as on September 9, 2018. At the time of investment, the particular paper was marked CARE AAA. Several downgrades later, it is now marked as CARE D.
As recovery was uncertain owing to the proceedings at National Company Law and Appellate Tribunal (NCLAT), Kotak Mahindra AMC marked down this exposure and made 100 percent provision on February 12, 2019. Also, the same Kotak FMP Series 183 had exposure to two Essel Group companies namely Edisons Utility and Konti Infrapowers & Multiventures, both secured via equity shares of Zee Entertainment Enterprises Ltd (ZEEL).
The total exposure to the Essel Group stood at 19.24 percent of AUM as on March 29, 2019. This 'Loan Against Shares' (LAS) carried a cover of 1.5x at the time of investment. This means that the Zee Group had given equity shares worth 1.5 times the loan that they had taken as collateral to Kotak Mahindra AMC. Following the steep fall in ZEEL shares in earlier this year, this cover came down to about 1.4x.
Here lies the worry for investors. Kotak Mahindra AMC should have sold the collateral that they held in terms of ZEEL shares but they couldn't. This because on January 26, 2019, a consortium of mutual fund houses with exposure to the Essel Group met with the promoters informally and decided that the group of lenders would not sell any further equity shares of ZEEL. The logic being a race to sell would harm the entire consortium and in turn the investors.
Sources privy to the developments told CNBC-TV18 that they are hopeful of a recovery, albeit delayed. Should this recovery come, it will be passed on to investors.
This is a problem which is not unique to Kotak Mahindra AMC. Industry insiders say that FMPs across fund houses have a collective exposure of about Rs 1,700 crore to the Essel Group. The three Kotak FMPs were just unlucky in terms of being the first few to mature. About 50 more such FMPs from about 10 AMCs are due for maturity in the weeks ahead.
Many industry experts said the event itself is not the reason for undue panic. However, it does raise many questions which I hope AMCs will answer at the earliest:
1. Was it known in January 26 meeting of lenders with Essel Group promoters that maturing FMPs would meet this fate? If yes, why wasn't it communicated until the eve of maturity of the product?
2. Has the LAS by the Essel Group been valued at zero since it defaulted on maturity or have AMCs extended the maturity to September 30, 2019? (Would Sebi allow maturity of underlying to be extended beyond the maturity of FMP?)
3. How have AMCs valued all Essel Group LAS in the rest of their funds? Any danger that future FMPs may not be able to return even principal?
4. Brickworks still values Edisons Utility Works and Konti Infrapower (secured by ZEEL equity shares and part of Kotak FMP) at 'A' rating. Given the recent news, should AMCs rely purely on this external rating? Why is more due diligence not being done at AMC level?
5. If the maturity date of FMP is not respected, what is the difference between FMP and Credit Risk Funds?
Having said that, the fact is that AMCs are pass-through vehicles and cannot be expected to bail out investors. The risk lies with the investors - both upside and downside. However, more should have been done three years ago to educate these very investors about the 'risk'.
At that time, most investors will tell you that most debt products were being sold as 'safe' investments with better returns than a bank fixed deposit. It was only in 2018 that debt funds revealed their true nature.
Nevertheless, many insiders tell that AMCs have learnt their lessons. A large part of the Credit Risk Fund and even FMPs are now rejigging portfolios that are being built around high investment grade issuers. Also, AMCs know that perhaps questionable portfolios will not be well received...at least that is the hope.
Hope also floats that a resolution on/before September 30 brings investors closer to their returns. After all, as some argue it is yet a perceived loss and not a realised loss.
"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 the company and sectoral-specific issues."
"We are working closely with the Essel Group for optimal recovery from Konti & Edisons for the benefit of our unitholders 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," said Rohit Rao, chief communication officer, Kotak Mahindra Group.
Please consult a financial advisor before making changes to your portfolio.
First Published: IST