Mumbai: CARE Ratings downgraded two Essel Group Companies, Essel Infraprojects Ltd and Essel Ahmedabad Godhra Tollroads Pvt Ltd, on Friday. In case of the former, CARE downgraded short-term bank facilities worth 146 crore to CARE A4 (Issuer Not Cooperating) from CARE A4 (Credit Watch With Negative Implications). For Essel Ahmedabad Godhra Tollroads Pvt Ltd. the downgrade was of long-term bank facilities worth 772.64 crores. In this case the rating was revised from CARE BB (Structured Obligation) to CARE C (Credit Enhancement); Negative; Issuer Not Cooperating.

In its rationale, CARE Ratings noted that despite sending repeated emails and other communications seeking information relevant to the rating from the companies in question, the requisite information was not received.

Essel Group has been at the centre of controversy after a consortium of lenders, including several mutual funds, agreed to a standstill agreement in Jan 2019. The lenders agreed to refrain from selling promoter shares that were offered as collateral against loans to various Essel Group companies till 30 September. Among these mutual funds, Franklin India Low Duration Fund has a 4.13% exposure to Essel Infraprojects.

Three other schemes of Franklin Templeton Mutual Fund — Franklin India Credit Risk Fund, Franklin India Short Term Income Fund and Franklin India Dynamic Accrual Fund — had exposure to Essel Infraprojects (as per data on 28 February 2019). Other mutual funds are exposed to other Essel group companies, which have not been downgraded in the ratings action today. However, the downgrades may set a precedent for similar ratings actions in other Essel Group companies, which could in turn trigger sharp drops in the net asset values of mutual funds holding them.

The overall exposure of mutual funds to the Essel Group is estimated at 7,000 crore. Barring Reliance Mutual Fund, all the other fund managers have so far decided not to sell the pleaded shares till September even as the papers neared a payment default.

Considering that these papers have been downgraded below investment grade the fund houses would need to value these accordingly to determine the extent of write-offs. It is unclear how the fund houses' standstill agreement would come into play as the fund managers were reluctant to label any of the Essel Group papers as default and take a write-off.

For instance, Kotak Mahindra Asset Management Co. Ltd withheld part of the redemptions from one of its fixed maturity plans (FMP) in April and HDFC Mutual Fund decided to extend the maturity of the FMP. Subsequently, earlier this month HDFC Mutual Fund took the Essel exposure of close to 500 crore on its books (transferring it from exposed FMPs maturing before 30 September).