A prominent lender to real estate companies, Altico Capital India Ltd, has defaulted on interest payments worth Rs 19.9 crore that were to be paid to Mashreq Bank of Dubai. Altico is a non-banking finance company (NBFC) backed by marquee investors such as Clearwater Capital Partners, Varde Partners, and Abu Dhabi Investment Council. This default comes at a time when the financial sector was just about recovering from a series of debt repayment crises starting from IL&FS to DHFL and Essel group.
The Altico event too has an impact on two mutual funds houses UTI Mutual Fund and Reliance Nippon Asset Management Company, some of whose schemes have exposure to the lender. Since debt mutual funds exposed to any debt issuer, that has defaulted or has been downgraded, mark down the valuation of such debt in their respective portfolios, they negatively impact scheme NAV. RupeeIQ examines which funds are impacted by this development. Read on.
Default and downgrade
Altico Capital India’s NCDs (non-convertible debentures) were rated ‘AA-/Stable’ before rating agencies did the downgrades late last week. On September 12, 2019, Care Ratings downgraded Altico’s proposed long term bank facilities and non-convertible debentures to ‘B’ rating, down from earlier ‘AA-‘ (Double A minus) owing to the payment default. A ‘B’ rating essentially meant the debt is below investment grade. On September 13, 2019, India Ratings also downgraded Altico’s long term and short term issuer ratings to ‘D’ (default) with a negative outlook.
Before we write more on Altico’s troubles, let’s check what is the impact on funds. Data shows that two open-ended debt schemes, and 13 close-ended schemes – all belonging to UTI MF and Reliance MF – are exposed to debt securities of Altico Capital. The first one is UTI Credit Risk Fund, managed by Ritesh Nambiar, which has Rs 201.8 crore exposure or 5.85% of the Rs 3,500-crore AUM, to Altico debt security maturing on August 16, 2021. Besides, UTI MF’s six fixed maturity plans too have a combined exposure of Rs 132 crore to Altico.
As a result of the downgrade, the September 13 NAV of the main portfolio of UTI Credit Risk Fund (regular-growth) is down by 5.7% from a day ago. Altico was UTI Credit Risk Fund’s 2nd biggest holding.
UTI MF resorts to side pocketing
Even though the maturity is still some time away, there is no guarantee that Altico will be okay by then. Because of this, the UTI Credit Risk Fund has implemented a side pocketing for Altico NCDs. With effect from September 13, 2019, the scheme has separated its about Rs 200 crore exposure from the rest of the portfolio. Creation of a segregated portfolio is a mechanism to separate stressed, illiquid and difficult-to-value asset from other assets in a portfolio.
“Upon recovery of money from Altico in the segregated portfolio, whether partial or full, will be distributed to investors in proportion to their holding in the segregated portfolio,” UTI MF said in a media statement.
Existing investors in UTI Credit Risk Fund have been allotted equal number of units in the Altico segregated portfolio as held in main scheme. No subscription or redemption is allowed in the segregated portfolio. New investors subscribing to the main scheme will be allotted units only in the main portfolio based on its NAV.
Reliance Ultra Short Fund’s exposure
The second open-ended debt scheme that is exposed to Altico is Reliance Ultra Short Duration Fund, managed by Anju Chhajer and Vivek Sharma. The scheme’s exposure to Altico debt securities is worth Rs 150 crore. One debt security, worth Rs 75 crore, is maturing on September 26 this year and the other one, worth Rs 75 crore, on March 26, 2021. The exposure accounts for about 4.6% of the fund’s Rs 3,200-crore assets.
Unless Altico is able to garner required funds or is able to extend the maturity period within September 26 this year, it can be assumed that there will be technically a default when the debt matures. There is often a grace period of seven days within which if the issuer repays the money, ‘default’ is not said to happen.
In any case, Reliance Ultra Short Duration Fund has shown uninspiring return performance in the 1-year period (1.84%), which is among the lowest in the category. The category average return in 1-year is 5.15%. In the 3-month period, Reliance Ultra Short Duration Fund has a -2.1% return, one of the poorest among peers. Category average return in 3-months is 1.05%. The scheme’s latest NAV (regular – growth option) as on September 13, 2019, is Rs 2,830.33, down 3.96% from a day ago when it was Rs 2947.13.
Reliance MF’s seven fixed maturity plans also have a combined exposure of Rs 63 crore to Altico’s debt papers, which seems to be negligible compared to the open-ended schemes.
Altico as a lender to real estate companies suffers from the continued pressure on the property sector. The business of construction lending is facing multiple headwinds like weak operating scenario, stretched working capital cycle, etc. That is why borrowers are unable to pay dues on time, leading to delinquencies.
As per Care Ratings, Altico’s PAT in FY19 declined by 44% mainly due to provisions/write off, which rose by 470% to Rs 336 crore in FY19. Rise in the provision/write off was mainly because Altico had two accounts worth Rs 732 crore which was sold to ARCs.
While the company till March 31, 2018, did not report any GNPA and NNPA, during FY19, two accounts slipped into NPA, as a result, GNPA and NNPA increase to 2.06%. GNPA plus write off a percentage of gross advances stood at 6.11% whereas NNPA plus write off a percentage of net worth stood at 12.68% as on March 31, 2019.
India Ratings said that it was communicated by Altico on September 12, 2019, that the company had unencumbered cash balance of Rs 490 crore. As per the management, Altico faced the pressure of accelerated debt repayment from some lenders and also experienced difficulty in mobilizing fresh funds. While the existing cash balance was sufficient to meet the present obligation, the company defaulted on this.
Shareholders (Fiera Capital, erstwhile Clearwater Capital Partners LLC acquired by Fiera Capital), Abu Dhabi Investment Council, and Varde Partners) had earlier articulated that they would ensure adequate liquidity for Altico (as per the board approved policy). “However, the shareholders were not forthcoming to shore up the liquidity buffers of the company. Given the recent developments, Ind-Ra opines that it may be difficult for Altico to service its debt obligations in a timely manner from hereon,” the rating agency says.
It is surprising that an NBFC company, backed by marquee names, had to default for interest payment of just Rs 20 crore. This event brings to light the high risk to lenders to real estate businesses. The real estate sector is in the doldrums. NBFCs particularly those lending directly to institutions suffer from more risk. If debt mutual funds lend money to these NBFCs, they are always taking higher risk. Lending debt MF money to NBFCs with a limited track-record should be avoided. Also, the concentration risk is something debt MFs have to pay more attention i.e. if an NBFC’s loan book is concentrated in the hands of a few borrowers, problems at one or two borrowers will cause great disruption.
Diversification is the only saving tool. Investors have to look at debt MF portfolios more closely. At the end of the day, a mutual fund is a pass-through vehicle and ultimately gain or loss is borne by investors. Debt MF investors should have a clear idea of what kind of NBFC papers will be bought by the fund manager. Questions posed by investors will force debt fund managers to be much more cautious about fresh lending to NBFCs. Retail investors who are new to funds should avoid investing in any debt MF product that takes more risk. Thus, it is better to stick to liquid funds that invest in the most-safe debt securities.
Disclaimer: Views expressed here in this article are for general information and reading purpose only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument.