Mumbai: In a bid to cushion a blow to its debt schemes, SBI Funds Management Pvt. Ltd has moved debt papers it holds of embattled Delhi-based realtor Unitech Ltd into its equity schemes.
This means investors in its equity schemes will have to bear any risk that the Unitech debt paper brings with it.
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By culling Unitech papers from its debt scheme, SBI Funds, the asset management venture of India’s largest bank by assets, State Bank of India, and French banking major Societe Generale SA, is essentially shielding these schemes from any default by Unitech.
Credit rating agency Icra Ltd in October downgraded Unitech’s Rs100 crore short-term debt programme from A1+ to A2+ (above average credit quality). The rating was withdrawn in November after the papers matured.
In January this year, Fitch Ratings India Pvt. Ltd downgraded Unitech’s Rs4,400 crore long-term debt to “B” from “BBB”, and Rs1,100 crore short-term debt programme to “F4” from “F3”. The “B” rating indicates a significantly weak credit risk relative to other issuers or issues in the country, and the “F4” rating means a highly uncertain capacity for timely payment of financial commitments.
Unitech had earlier said it has cut its debt obligations due by March to Rs600 crore from Rs2,500 crore, by repaying in part Rs900 crore to mutual funds and restructuring some bank loans, as reported in Mint on 20 January.
Debt schemes are conservative on their returns and a small exposure to a bad asset can severely dent performance of such schemes.
According to data from the website of Value Research India Pvt. Ltd, a research service on mutual funds, five of SBI Funds’ equity schemes have a cumulative exposure of Rs65 crore to Unitech’s commercial paper, or a form of tradable debt issued by the company.
Given that these five equity schemes with Unitech exposure are down 46-63% in the past year, and that investors have already factored in market volatility, a default by Unitech on this commercial paper can be better and less noticeably absorbed by equity schemes, two fund managers that Mint spoke with said.
“The impact on the equity schemes in an already volatile market will be minimal,” said a distributor of funds, who didn’t want to be named as he also sells SBI Funds schemes. This is because the Unitech exposure in these schemes is 1.38-1.69% of their individual portfolios.
“The larger issue is why you should penalize an investor in an equity fund for a hit that the debt fund investor should have taken, or the AMC (asset management company) itself should have taken for a call gone wrong,” he said.
SBI Fund’s managing director and chief executive Achal Gupta, however, defended the firm’s move and said: “Inter-scheme transfers happen from time to time, and they’re done according to Sebi (market regulator Securities and Exchange Board of India) guidelines, in keeping with the objective of the schemes to which they are transferred.” Sebi rules say equity funds can have a debt exposure of up to 35% in their total portfolio.
Mint could not independently confirm when these transfers were made, though Gupta said it would likely have been made before Unitech’s paper was downgraded by credit rating agencies.
“As per law, we cannot make a transfer after the paper gets downgraded. So it must have been done in October, if not earlier,” he said, adding that even if there was a fear of a downgrade, SBI Funds would not have transferred the paper as it would have meant a dilution in the schemes’ portfolio quality.
At the time of the downgrade, Fitch had said in a statement that “the downgrade reflects the company’s continued delay in raising the required funds as earlier projected and increasing uncertainty regarding its ability to service its interest cost and fulfil its immediate debt/land payment obligations.”
It also said while Unitech had made some progress on its asset sales and fund raising from other sources, the quantum and timing of these remained uncertain, increasing the risk of delays in servicing its debt obligations on time.
SBI Funds’ moving Unitech paper from debt to equity schemes comes in the wake of other AMCs also resorting to transferring some real estate debt papers they hold to their parent organisations. Mint had reported on 15 December, 2008, that state-owned Life Insurance Corp. of India Ltd had in October bought at least Rs1,755 crore worth of illiquid debt paper, largely of real estate firms, from its mutual fund subsidiary, LIC Asset Management Company Ltd (LIC MF).
On 4 November, 2008, The Economic Times newspaper had reported that HDFC Asset Management Co. Ltd, the country’s second largest fund house by assets under management, had sold Rs650 crore worth of real estate paper to a firm that’s part of its parent, Housing Development Finance Corp. Ltd.
Photo by Ramesh Pathania / Mint; Graphics by Ahmed Raza Khan / Mint