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The persisting instance of credit-quality issues with the debt instruments held by mutual funds have kept MF investors jittery.
The latest one is with unrated bonds issued by Adilink Infra & Multitrading, a subsidiary of Essel Group, which defaulted on the repayment to a minority investor. These distressed non-convertible debentures (NCDs) issued by Adilink mature in March 2020. Aditya Birla Sun Life Mutual Fund holds 98.65 per cent of the debentures and the remaining is held by another minority investor.
On November 25, Aditya Birla Sun Life Mutual Fund came to know that the issuer failed to honour the payment to the minority investor, when the minority investor exercised the put option. A put option gives the holder the right to sell assets at an agreed price on or before a particular date.
Aditya Birla AMC has considered this default as a credit event and proposed to create segregated portfolios for Adilink exposure. The AMC has a cumulative exposure of ₹792.7 crore to the distressed Adilink bonds in its three schemes — Aditya Birla Sun Life Medium Term Plan (₹419 crore), Aditya Birla Sun Life Credit Risk Fund (₹213 crore) and Aditya Birla Sun Life Dynamic Bond Fund (₹161 crore).
They have an exposure of 7.5 per cent, 3.7 per cent and 5.6 per cent to the paper, respectively. On November 25, the AMC wrote down whole values of distressed assets in their portfolio schemes, which resulted in a drop in their NAVs by 7.4, 3.6 and 5.5 per cent, respectively.
Segregated portfolios
Aditya Birla mutual fund segregated the distressed Adilink bonds from the portfolios of the three schemes mentioned above and created three separate portfolios. Market regulator SEBI has permitted AMCs to create a segregated portfolio in case of a credit event, in order to ensure fair treatment to all investors and provide liquidity.
A segregated portfolio consists of debt papers affected by a credit event.
The investor thus has two portfolios, a segregated portfolio and a main portfolio. In the above issue, existing investors in the schemes have been allotted an equal number of units of the segregated portfolio as the main portfolios.
No subscription and redemption will be allowed in the segregated portfolio.
However, these schemes (with the segregated portfolio) will be listed in the exchanges. The unit-holders may exit through the secondary market route, but will face liquidity issues. Upon recovery of money, it will be distributed to the investors in proportion to their holding in the segregated portfolio.
What’s in it for investors
Currently, there is no loss for existing investors in these schemes as they also hold units of the segregated portfolio schemes.
According to Aditya Birla AMC, the repayment of the Adilink NCDs is expected to be done through monetisation of road assets which are pledged to the AMC as security.
Given that these are unlisted infrastructure assets, the sale process is a little long drawn owing to negotiation and finalisation of all commercials, documentation and authority approvals.
If the monetisation process is successfully completed for the portfolio, the investors will recover the entire amount held in the segregated portfolio.
It is to be noted that Aditya Birla mutual fund recovered its 100 per cent due from Essel group which was associated with the earlier credit events related to NCDs issued by Sprit Infrapower, one of the other subsidiaries of the Essel group.
However, in this Adilink issue, monetisation of pledged road assets would be relatively difficult and the process may take a long time.
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