UTI Mutual Fund, India’s seventh-largest asset management company, plans to create a segregated portfolio in respect of its exposure to Altico Capital in its credit risk fund, effective September 13.
That means that investors who wish to redeem their money from UTI Credit Risk Fund will not be able to get their entire amount until the fund recovers its money from Altico Capital.
The moves comes after Altico, which lends to real estate companies, defaulted on its interest payments to Dubai’s Mashreq Bank on Thursday. As of September 12, UTI Credit Risk Fund had an exposure of Rs 201.82 crore in debt security of Altico Capital, which amounts to 5.85 per cent of the fund’s asset under management.
The Securities and Exchange Board of India (SEBI) had earlier this year introduced side pocketing of select securities, wherein securities that are downgraded or that have defaulted could be segregated from the rest of the good portfolio of a fund. The money from such a segregated portfolio is returned to investors only after the money from the particular security is recovered.
“Existing investors in the scheme as on the day of creation of segregated portfolio, shall be allotted equal number of units in the segregated portfolio as held in the main portfolio. No subscription and redemption will be allowed in the segregated portfolio of the captioned schemes. Upon recovery of money from Altico Capital in the segregated portfolio, whether partial or full, it will be distributed to the investors in proportion to their holding,” UTI MF said on Friday.
Investors redeeming their units will get redemption proceeds based on the net asset value of main portfolio and will continue to hold the units of segregated portfolio, it added.
Mumbai-based Altico Capital had said that it failed to make interest payment worth Rs 19.97 crore to Mashreq Bank PSC on Thursday. The interest payment default was on a principal of Rs 340 crore. The company said it was evaluating options for resolving the liquidity crisis, but warned that there could be more defaults in the future.
“Our failure to repay the amounts set out above may result in an acceleration of interest repayment/ redemption obligations in respect of non-convertible debt securities issued by us and may trigger a default in their timely repayments,” Altico Capital said.
On Thursday, CARE Ratings downgraded Altico Capital’s long-term bank facilities to B with a negative outlook from AA- with a stable outlook.
Earlier, on September 3, India Ratings and Research had downgraded long-term issuer ratings on Altico Capital to A+ from AA- with a negative outlook.
“The revision takes into account the continued pressure on the real estate sector, which has resulted in a weakened operating environment for the construction lending business, the stretched working capital cycle for real estate borrowers, which has led to volatile delinquencies, tighter funding, which has resulted in wider spreads, and diluted on-balance sheet liquidity buffers,” India Ratings had said.
Such segregation of mutual fund portfolios is not new. Earlier this year, Kotak Mutual Fund had delayed full redemptions in six of its fixed maturity plans due to delays in recovering money these schemes had lent to the Subhash Chandra-led Essel Group.
HDFC Mutual Fund too was unable to recover a part of its portfolio in one of its schemes exposed to Essel Group. In June, HDFC MF announced that it would purchase Essel Group’s non-convertible debentures worth Rs 500 crore held in its fixed maturity plans, thus giving some respite to investors.
Earlier this month, Essel Group repaid some of its outstanding money owed to mutual funds, following 11 per cent stake sale in its flagship Zee Entertainment to global fund Invesco Oppenheimer.
