UTI MF opposes 42% haircut for IL&FS entity, challenges its 'amber' status

Fund house says proposal completely ignores sponsor undertaking and differentiation between secured and unsecured lenders

UTI Mutual Fund (MF) has taken objection to IL&FS group officials' proposal that lenders should take 42 per cent haircut on their exposure to the group's special purpose vehicle -- Jorabat Shillong Expressway (JSEL).

"UTI MF has strongly objected to the proposal shared as it completely ignored the sponsor undertaking and differentiation between secured and unsecured lenders," the fund house said in an investor note.

The note pointed out that the haircut was proposed when the fund house met IL&FS officials to discuss how JSEL's classification can be changed from 'amber' entity.

'Amber' entities are those entities that are not able to meet all their obligations (financial and operational), but can meet only operational payment obligations and obligations to senior secured financial creditors.

A 'green' classification would allow the entity to service all its debt obligations.

IL&FS Transportation Networks -- which is the sponsor for JSEL -- has received 14 binding bids for 10 of its road projects including JSEL as of August 30, 2019. As per the affidavit filed by IL&FS, the board of IL&FS is evaluating the bids.

In the meantime, UTI MF is exploring various other options to expedite the bidding process and is following up for the same with IL&FS, NCLAT and any other possible legal route to protect its investment in JSEL.

UTI MF has also filed an intervention application, challenging the classification of JSEL being classified an 'amber' entity as JSEL has sufficient balances to pay its senior secured lenders (i.e. UTI MF) and ITNL. According to the note, JSEL has signed a sponsor undertaking stating that none of the group debt will be due and paid till the time secured lenders are paid off completely.

Before the IL&FS group companies were put under moratorium last year, the repayment mechanism of JSEL involved an escrow account where the annuities (annual payments) received from NHAI (i.e. National Highway Authority of India) was deposited and funds in this account were handled by debenture trustees, who acted on behalf of bondholders.