In the first week of Aug-19 (can read it here) I wrote on the story being peddled by two large AMCs as to why the stake sale by Essel (ZEE) group was good for their funds and they also nudged investors to put in more money. I concluded that investors were better off staying away from those funds. Fast forward 2 months and on 3^rd Oct 2019, the rating agency – Brickworks has downgraded a paper issued by the Essel Group.

Aditya Birla Mutual Fund has since then downgraded the NAVs of these 3 funds and issued this (unofficial) release:

• Why would an AMC not invoke the pledge in the face of steep fall in the underlying?
• Where is the margin of safety in 2X value if the underlying has already corrected 50%?
• Out of total securitization of 1064.50 Crores by Sprit, ABSL MF has exposure to 787 Crores. That’s a good 74%. Is ABSL in the business of funding the promoters of ZEE?
• After the proverbial shit hitting the fan (disclosure that ZEE has 90% of promoter stake pledged) why is ABSL still “expecting” to be paid from stake sale?

Let us look at relative performance in these beleaguered debt funds since then:

• 2 of 3 funds from Birla stable are already in negative territory in just 2 months.
• Third Birla fund has given 0.46% return in a 2-month period. Just 1 (rogue) paper has dragged the performance of the fund.
• ICICI MF has not yet acted on the rating update. It has no other option but to act on it. It is not a question whether it will happen or not. Just a question of when it would happen.

Let us also look at the underlying whose shares were pledged against these loans:

While broad indices were almost flat, ZEE has fallen more than 25% in last 2 months and almost 50% YTD. I wonder what comfort the lenders now have on their 2X collateral? 2X of junk is also junk isn’t it?

On a lighter note, it seems ZEE investors also get entertainment off-screen! On a serious note – ABSL so far, has not acted in good faith towards its investors. All the decisions seem to favour promoters of ZEE. What can an investor do? New investor – keep distance. Existing ones – get out while you still can.