side pocketing in mutual fundsAfter inserting the provisions with respect to creation of segregated portfolio or side pockets in as many as 12 debt funds in August, Aditya Birla Sun Life MF has now finally created side pockets in three schemes i.e. Aditya Birla Sun Life Medium Term Plan, Aditya Birla Sun Life Credit Risk Fund and Aditya Birla Sun Life Dynamic Bond Fund. These three schemes had a combined exposure of over Rs 790 crore to Zee/Essel group entity Adilink Infra & Multitrading Private Limited.

With Adilink defaulting to the same security issued by it to another bondholder on November 25, 2019, Aditya Birla Sun Life MF was forced to join the side-pocket bandwagon. So far, AMCs like Tata, Nippon India (erstwhile Reliance Nippon) and UTI have created side pockets.

Aditya Birla Sun Life MF investors should note that with effect from November 25, 2019, 0% ADILINK IMPL 28MAR20 (PC 28JUN19), issued by Adilink Infra & Multitrading Private Limited will be segregated from the total portfolio of the three schemes.

This segregation event marks a rather unexpected development to the Zee/Essel group exposure saga for Aditya Birla Sun Life MF. The episode began in late January this year when it was first revealed that Aditya Birla Sun Life MF had significant exposure to the embattled group. Usually, when a debt issuer is unable to repay as per decided timelines, lenders including mutual funds offload the security with them and get the required money.

But in the case of Zee/Essel group – led by powerful media mogul Subhash Chandra, some mutual funds made an exception — they gave more time to repay i.e. a standstill arrangement was done. About half a dozen AMCs including Aditya Birla Sun Life were party to the standstill pact.

All along, Aditya Birla Sun Life MF top management have appeared supremely confident that Zee/Essel group exposure would not impact investors much.

The Aditya Birla Sun Life AMC/MF’s Adilink Infra & Multitrading Pvt Ltd exposure is understood to be primarily secured against the company’s road assets and the road holding company of Essel Infrastructure. Put together, Aditya Birla Sun Life AMC/MF’s exposure to Zee/Essel group entities Adilink, Sprit Infrapower and Essel Lucknow Raebareli Toll Roads was about Rs 2,900 crore at the beginning.

As mentioned above, few fund-houses like Aditya Birla Sun Life extended an olive branch to Zee/Essel group in the form of time extension to repay the debt. The first deadline to repay the debt expired in September-end and then another extension for six months was given.

“Aditya Birla Sun Life Medium Term Plan, Aditya Birla Sun Life Credit Risk Fund and Aditya Birla Sun Life Dynamic Bond Fund (“the Schemes”) have exposure to a security issued by Adilink Infra & Multitrading Private Limited (the Issuer). Pursuant to the default of the security issued by the Issuer to another bondholder on November 25, 2019, Aditya Birla Sun Life AMC Limited proposes to create segregated portfolio in the Schemes with effect from November 25, 2019,” a statement from the fund-house said.

Take a look below at the exposure to the concerned debt security issued by Adilink to the Aditya Birla Sun Life AMC/MF schemes.

ABSL MF Adlink side pocket
Read the AMC’s official communique on Adilink side pocket here and here.

Impact on debt MF investors

Existing investors in Aditya Birla Sun Life Medium Term Plan, Aditya Birla Sun Life Credit Risk Fund and Aditya Birla Sun Life Dynamic Bond Fund schemes, as on the day of creation of segregated portfolio(s), will be allotted equal number of units in the segregated portfolio(s) as held in the main portfolio(s).

Upon recovery of money from the Issuer in the segregated portfolio(s), whether partial or full, it will be distributed to the investors in proportion to their holding in the segregated portfolio(s).

No subscription and redemption will be allowed in the segregated portfolio(s) of the Aditya Birla Sun Life Medium Term Plan, Aditya Birla Sun Life Credit Risk Fund and Aditya Birla Sun Life Dynamic Bond Fund schemes.

Investors redeeming their units will get redemption proceeds based on the Net Asset Value (NAV) of main portfolio(s) and will continue to hold the units of segregated portfolio(s).

Investors subscribing to the schemes will be allotted units only in the main portfolio(s) based on its NAV.

The AMC will enable listing of units of segregated portfolio(s) on the recognized stock exchange within 10 working days of creation of segregated portfolio(s) and enable transfer of such units on receipt of transfer requests.

The AMC will also disclose separate NAVs of segregated and main portfolios from the date of creation of segregated portfolio(s).

A statement of account indicating the NAV and units held by the investors in the main and segregated portfolio(s) as on the day of the credit event will be communicated to the investors within five working days of creation of the segregated portfolio(s).

Aditya Birla SL AMC received some money in Sep 2019

On September 12, 2019, Aditya Birla Sun Life Mutual Fund (ABSL MF) has received 1st tranche of payment from Essel Group against exposure in Sprit Infrapower & Multiventures Private Limited. ABSL MF had an exposure of Rs 1,500 crore (face value) to zero coupon Bonds issued by Sprit Infrapower & Multiventures Private Limited, an Essel Group company.

As per Aditya Birla Sun Life AMC, Essel group had made a partial payment of Rs 764 crore (equivalent to 51% of the face value), through buyback/prepayment of bonds.

How it all began

* Zee promoters had raised personal debt against their shareholding of listed stock Zee Entertainment Enterprises.

* In late January, Zee share prices fell sharply by around 26%. Pursuant to this, listed security cover to that exposure fell.

* At that juncture, Aditya Birla Sun Life said simultaneous invoking of security by all lenders at the same time would have caused a huge oversupply in the market, and further erode the value of the Zee share collateral held by various lenders.

* To ensure that lenders’ interest is protected, the lenders (comprising of NBFCs, Mutual Funds and Banks) met with Zee promoters.

*The promoters assured that stake sale of Zee Entertainment will get completed in a timely fashion, and that the monetization of promoter’s stake will be used to repay all the lenders. The promoters are also actively progressing in their infrastructure asset monetization process.

Latest update on Zee/Essel

On November 21, some institutional investors bailed out the promoters of Zee Entertainment Enterprises Ltd. (ZEEL) by buying a 15.7% stake in the company. This has helped Subhash Chandra repay lenders more than Rs 11,000 crore of promoter debt.

Subhash Chandra has now resigned as chairman of the ZEEL’s board with immediate effect. He, however, will continue as non-executive director.

The Chandras-led cash-starved Essel Group on November 20 said it is planning to sell 16.5% stake in its flagship ZEEL to financial creditors to meet its loan repayment obligations.

In September, the group had sold 11% stake in ZEEL to Invesco-Oppenheimer fund for over Rs 4,224 crore and then retired debt worth Rs 4,000 crore. At that time, Zee/Essel group had made a part payment to the tune of Rs 2,300 crore to some MFs.

Additional Reading:

3 Tata MF Schemes Opt For ‘Side-Pocket’ After Stuck With DHFL Papers; A Win-Win For Both AMC And Investors

Reliance MF’s Two Schemes Create Side Pocket For Below-Investment Grade Reliance Capital Exposure

Altico Capital Default: UTI Credit Risk Fund Creates Side Pocket

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.