UTI Mutual Fund has investments of around Rs 95 crore in Zee Learn, says Amandeep Singh Chopra, the group president & head of fixed income at UTI AMC. In an interview with FE, Chopra said that financial markets are still fragile and there is a fair amount of risk aversion. Excerpts:
What kind of exposure does UTI MF have in Zee Group and its subsidiaries?
We have investments of `95 crore in UTI Credit Risk Fund and UTI Medium Term Fund in the listed company Zee Learn, which is a child development and education company. Zee Learn is a highly profitable company making an Ebitda of `126 crore in M9FY19 with a debt of only `400 crore. Our NCDs are secured by 1.1 times of fixed and current assets and, furthermore, we also have corporate undertaking from Zee Entertainment, a listed company with a market cap of `40,000 crore. Hence, our NCDs are rated AA+(SO). Other than this, we do not have any other exposure to the Zee Group or its subsidiaries including promoter companies.
But MF industry has an exposure of over `8,000 crore in Zee Group and its subsidiaries…
You must understand that there is a difference between the promoter debt and operating company debt. For example, it is reported that total exposure of Zee Group and its entities is `8,000 crore. This `8,000 crore number being reported in the press includes, I believe, approximately `6,000 crore of promoter debt raised in his personal capacity through share pledges, which has been restructured till September as already reported. The balance debt of the operating companies is not facing any stress or payment issues. So, actually the exposure of concern is the promoters debt and the perception being created is that all debt of Zee Group is under some stress. The loan against share (LAS) bonds have been downgraded from AA from A. But operating/listed companies like Zee Entertainment and ZEE Learn are still rated AA+/AA+(SO).
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Several of the debt funds have given returns in the range of 5-7% in the past one year. What has gone wrong?
The first six months of last financial year were very adverse for interest rates when RBI was hiking interest rates and liquidity was tight. This impacted performance of debt funds, which was further exacerbated when the IL&FS default occurred and the corporate bond spreads widened. But in the last four months — from December onwards — the rate environment has improved significantly with two rate cuts, a strong rally in the 10-year and measures to impart additional liquidity. But you still have a base effect of previous six months period, which has pulled down the returns of the last one year. To give a perspective, in September 2016, 10 year yield was at a high of 8.14%, it is now at 7.39% and at the same time in April 2018 the yield was 7.54%, so from the September peak and also from April last year, it has come down. But yield of AAA-rated bond in September was around 9%, its still about 8.5% and in April 2018 it was about 8.20% and it is still higher that what it was a year ago.
We have seen huge participation from MFs in LAS in the past few years? How big is the market right now? What was it three-four years ago? What steps will be taken at fund houses level to reduce it?
There are no precise data on this but I understand the size of this market is around `1,20,000 crore, of which MFs could have around `25,000 crore. This was a few thousand crores five years ago. LAS were offering higher yields and maybe MFs were attracted to it. So, if AAA-rated bonds were at a yield of 8.5%, LAS was giving yields of 10.5-12%, which was much higher reflecting the underlying risk of equity shares and lower rating. I’m sure regulators are looking closely at the recent events and may propose some appropriate guidelines. At UTI, we don’t invest in LAS and don’t have any exposure.
We understand that there are concerns on valuation of these share-backed bonds across funds and that there could be violations of FMP guidelines with underlying securities having maturity beyond that of the FMP after restructuring. One fund house has not given full amount of their fixed maturity plans (FMPs) to investors, how will it impact investors?
I am not aware of the specifics but in term of Sebi regulations, for close-ended funds like FMPs, the underlying instruments cannot have maturity beyond the maturity of scheme at launch. Any subsequent changes/roll-overs is a grey area. If the bond has been marked down to zero due to default/non-payment on maturity, the AMC has up to two years to make efforts to recover and payback to the investors. I think AMCs will make full efforts to protect investor interests and minimise the downside, so the investors should not panic.
Do you think MFs mis-sold FMPs as an alternative to bank FD?
FMPs are launched with some very transparent portfolio characteristics under strict Sebi regulations. I strongly believe that FMPs are a good alternative to FDs and help in developing the corporate bond markets. Investors need to understand that all FMPs are not alike.
Since FMPs have to upfront indicate the rating profile of the portfolio, which can be of only AAAs, G-Secs or a mix of these with AA and A-rated instruments, so the risk profile is also very different. It is important for MFs to communicate this clearly and for the distributors and investors to understand the risk profile before they invest. So, if they invest in a FMP with, say A-rated instruments, then there will be some credit risks along with higher returns. Selling without highlighting the portfolio characteristics and only on expected returns could be construed as mis-selling.