After weeks of silence, HDFC Mutual Fund has finally spoken. The country’s leading fund house in a note has sought to assuage frayed nerves and rising tempers among fixed income investors, saying the option to extend the maturities of Essel group exposures and allowing additional time to complete the strategic stake sale offers a good chance of “higher/complete” recovery against debt exposures.
The top fund house reasoned that the other option to invoke pledged shares of Essel group entities and sell immediately “most likely” would have resulted in significant under recovery.
HDFC Mutual Fund (HDFC MF) under a few schemes has debt exposures to Essel group entities secured by pledge of shares of Zee Entertainment Enterprises Limited (ZEEL) as well as Dish TV Ltd (Dish). It is estimated that HDFC MF has an exposure of Rs 1,100 crore to the Essel Group, one of the highest among AMCs.
Only days ago, HDFC Mutual Fund had announced that it plans to extend the maturity of HDFC FMP 1168D February 2016 (1) by 380 days, while the fund house linked the official reason for the roll-over to investment opportunities in the short maturity bucket. But most did not buy the explanation as the HDFC FMP in question has large exposure to Essel Group firms.
On January 25, 2019, share price of ZEEL and Dish fell sharply by 26% and 33%, respectively, primarily on reports of pledged shares of promoters being invoked and sold. This resulted in security cover against HDFC MF exposures falling below the prescribed threshold as per the NCD documents.
As per HDFC MF, the Essel Group promoters conveyed their inability to provide additional equity shares as most of their domestic shareholding was already pledged. “Consequently, a meeting was held between the promoters and the group of lenders and it was agreed to provide additional time to promoters to complete their ongoing strategic sale plan of ZEEL shares,” HDFC MF said.
As on date, over 75% of the lenders have agreed to provide additional time to Essel Group promoters to complete the ongoing strategic sale.
Providing a rationale for providing additional time to Essel group promoters to complete the on-going strategic stake sale, HDFC MF says that this is an unprecedented situation and it is acting to the best of judgement keeping in mind the interest of unit holders.
On fall in ZEEL and Dish TV share prices, as a lender, HDFC MF, said, it had primarily two choices:
(1) To invoke pledged shares and sell immediately – Given the sharp fall in prices, most lenders (with pledged shares equal to ~25% of equity capital of ZEEL) could have invoked the pledged shares and sold in the market. “However, most likely this would have resulted in significant under recovery. To give a perspective, on January 25, 2019 invocation of mere 0.6% of equity share capital of ZEEL resulted in fall of 26% in share price. Thus, even if few major lenders would have invoked the pledged shares, fall in share price could have been even steep and realised value against the debt would have been significantly low,” HDFC MF said.
(2) To extend the maturities of Essel group exposures and allowing additional time to complete the strategic stake sale – This option offered a good chance of higher/complete recovery against debt exposures. “Further, even if stake sale did not materialise, lenders felt that they were not worse off and will be in similar position as option 1, albeit with some delay. Thus, risk reward seemed clearly in favour of providing additional time to Essel group. Thus, in the given circumstances, this was the best course of action available with lenders,” HDFC MF said.
Apart from above, HDFC MF said it also used the following consideration to reach this decision.
a. ZEEL business has a strong intrinsic value, in our opinion, which could be an attractive potential acquisition target. Further, the current issue pertains to promoter level debt only and ZEEL’s business and financials continue to remain robust and healthy.
b. Assurance from promoters that strategic sale will be completed in time bound manner and this is likely to help promoters sizeably reduce their debt and release pledge against the shares. The stake sale is expected to be completed by September 30, 2019.
c. Comfort from the fact that our exposure is secured by pledge over the equity shares of ZEEL or ZEEL along with Dish TV.
“Thus, on weighing both the options, majority of lenders felt that it is in best interest of unit holders to give additional time to Essel group promoters for completion of stake sale,” the fund house said.
With regard to the exposure of HDFC MF, the minimum security cover required to be maintained was 1.5 times (secured by ZEEL shares only) or 1.75 times (secured by ZEEL as well as Dish equity shares).
Subsequent to the aforesaid extension, as on April 11, 2019, the share prices of ZEEL as well as Dish TV have recovered by ~30% and ~70% respectively (from the closing price as on January 25, 2019) and security cover of exposures have improved significantly. Based on closing share price as on April 11, 2019, the security cover across HDFC MF’s schemes is in the range of 1.4 times to 1.8 times.
HDFC MF has also outlined the future course of action for Fixed Maturity Plans (FMPs) having investments in Essel group exposure and maturing before September 30, 2019.
As the consequence of agreeing to provide additional time to Essel group promoters, the maturity of the debt exposure in Essel group has been extended beyond the maturity of few fixed maturity plans. HDFC MF said it will adopt either of the following options, which it deems appropriate to safeguard the interest of unit holders:
(1) FMPs that have exposure to ESSEL Group may be rolled over in accordance with the provisions Regulations 33(4) and other applicable regulations of SEBI (MF) Regulations.
All those unit holders, who do not opt for roll over or have not given written consent, shall be allowed to redeem their units at prevailing NAVs. The valuation of the Essel group exposures / securities will be arrived based on the valuation provided by the AMFI approved independent valuation agencies as on the date of redemption.
(2) The unit holders will receive the maturity proceeds on due date of maturity of the FMPs excluding the value of debt exposures to ZEEL group. The residual amount of the maturity proceeds of the FMPs pertaining to Essel group exposure would be paid on receipt of the dues from Essel group.
The latest communique comes two months after HDFC MF on February 4 had shared a brief note on developments surrounding Essel group entities and the fund house’s exposures. You can read it once more here.