Liquidity woes plaguing Altico Capital pose new risks for MF investors

Liquidity issues plaguing Altico Capital — a private equity (PE)-backed developer financier — may add to concerns of debt mutual fund (MF) investors. According to data from Value Research, Reliance Nippon Life AMC (RNam) and UTI MF had Rs 537 crore of debt exposure to the company, as of August-end. 

According to industry sources, investors may see mark-to-market (MTM) impact once valuation agencies revise the security’s pricing to factor in the firm’s default on interest payment of Rs 19.9 crore. This payment was related to an external commercial borrowing. 

On Friday, UTI MF said it would use the side-pocket mechanism to create a separate portfolio for parking Altico’s Rs 200-crore exposure in its Credit Risk Fund (5.85 per cent of scheme assets). RNam has also said it would seek trustees’ approval to side-pocket its Rs 150-crore (4.6 per cent of scheme assets) exposure in its Ultra Short Duration Scheme. 

The Securities and Exchange Board of India norms state that the decision to side-pocket must be taken immediately after a corporate entity is downgraded to below-investment grade. 

Such a portfolio is created to ensure that only those existing investors, who are hit by the downgrade, get the upside of future recovery. Hence, units of this portfolio are allotted only to existing investors on the day of the credit event. 

On Thursday, CARE Ratings downgraded the debentures of the company to below-investment grade, after it missed the interest payment. RNam’s Ultra Short Duration Fund had exposure to two debentures of Altico as of August-end, with one set to mature on September 26, showed Value Research data.

Stress test

• RNam's Ultra Short Duration had Rs 150 crore exposed to Altico
• One debenture held by RNam matures on September 26, 2019
• UTI MF’s Credit Risk Fund had Rs 200 crore of debt exposure
• Both fund houses will be using side-pocket mechanism, following the downgrade
• Investors may see MTM impact once valuation agencies revise pricing

In an exchange note, Altico said it may have trouble making future repayments. “Our failure to repay the amounts may result in an acceleration of interest repayment and redemption obligations, in respect of non-convertible debt securities issued by us, and may trigger a default in their timely repayments.”

UTI MF has, however, expressed confidence on Altico’s fundamentals. It said the default was caused by an asset-liability mismatch triggered by an earlier downgrade, and the subsequent acceleration of various borrowings that had prompted Altico to freeze payments till the liquidity situation improved. 

“Given the low gearing ratio of the company, there is sufficient cushion to clear dues, even in a stressed asset sale scenario situation,” said UTI MF. 

The remaining Rs 133-crore exposure to UTI MF (as of August-end) was held in its six fixed-maturity plans (FMPs). Among these, the highest were in UTI Fixed Term Income (FTI) Fund-Series XXIX – IX (Rs 30.8 crore), UTI FTI Series XXVII (Rs 28 crore) and UTI FTI Series XXX-III (Rs 22.79 crore). 

The median exposure of the six close-end schemes was 10.27 per cent of scheme assets. Five of these are maturing in 2021, with the last maturing on September 2, 2020, shows Value Research data.

The remaining Rs 53 crore of Altico’s exposure was held across seven of RNam’s FMPs. The highest of these were with Reliance Fixed Horizon Fund (FHF) XXXX – Series 3 (Rs 12.31 crore), Reliance FHF XXXVIII – Series 2 (Rs 11.36 crore) and Reliance FHF XXXIX-Series 5 (Rs 10.7 crore). The median exposure of the seven close-end schemes was 6.92 per cent of scheme assets, with all maturing in 2022. 

Investors of these FMPs are unlikely to see any immediate impact with maturity dates of the FMPs still some time away. This is the second downgrade for the firm this month. On September 3, India Ratings downgraded its long-term issuer rating from double A-minus to single A-plus. 

The note said the company’s loan book had exposure of Rs 6,900 crore to real estate developers, most of which were facing stretched credit profiles. The note added that 31 per cent of Altico’s loan book was attributable to early stage funding of projects as of July, and 70 per cent of the loan book was under moratorium as of June.