Rising Debt, Minimal Revenues – Yet Mutual Funds Funded These Essel Group Companies

A BloombergQuint investigation examines how mutual funds continued to finance these three companies despite their worsening debt profile.

1. Sprit Infrapower & Multiventures Pvt. Ltd.
2. Edisons Infrapower & Multiventures Pvt. Ltd.
3. Konti Infrapower & Multiventures Pvt. Ltd.

Due to debt investments in these companies, schemes of Kotak Mutual Fund were unable to fully repay unitholders on redemption last month. Similarly, HDFC Mutual Fund rolled over a scheme to delay redemption. Eight more schemes that loaned money to these companies will mature in the quarter-ended June 2019. Their unitholders will suffer too.

A Balasubramanium, chief executive officer at Aditya Birla Sunlife AMC Ltd., in a phone conversation with BloombergQuint, explained why mutual funds invested in Sprit’s debt despite its loss. The AMC is among those with the largest exposure to the debt instruments issued by these Essel Group companies.

Sprit Infrapower is a holding company, whose major source of income is the dividend and interest earned from investments, and its expense is largely comprises finance cost on borrowings, Balasubramanium said.  In the previous years, as the finance costs outweighed income, the company reported losses, he said, adding that it’s uniform across holding companies that borrow on behalf of the group entities. “The exposure to the company is against pledged equity shares of group’s listed entity/entities. At ZEEL’s current market price of Rs 430 (apiece as of May 2, 2019), our cover is 1.4 times the loan amount.”

This collateral cover is what mutual funds have emphasised on to explain both, their financing of this debt and the recent standstill. And yet, the financials of these Essel group companies beg the question—why did mutual funds miss recognising the risks before the Essel Group defaulted?

How Did It Get So Bad?

All three Essel Group companies have invested in infrastructure projects.

For the last seven years, all of them consistently reported losses against marginal revenues, according to filings with the Registrar of Companies. And yet they continued to get loans from mutual funds.

As of March 2018, they had total external debt of Rs 4,353 crore, 13 times of what it was on March 2013. Almost three-fourths of the additional debt taken over those five years came from mutual funds. Mostly via non-convertible debentures backed by promoter equity in the listed companies—Zee Entertainment Enterprise and Dish TV Ltd.

The data makes clear that while in 2013 related-party loans were the key source of funds for these three companies. By 2018, mutual funds played an equal role. Of course, the related-party debt may have also originated via mutual funds, among other lenders. That granularity in data is not available.

But what the data does show is that never once in these five years did any of the three companies make enough revenue to even service the debt.

Sprit Infrapower & Multiventures

Sprit Infrapower, the largest investment company of the group, saw its debt level rise to Rs 4,969.06 crore as of March 2018 from Rs 1,449 crore five years earlier. The additional debt was used to invest in infrastructure projects as well as to refinance earlier loans and make interest payments.

The company’s annual revenue ranged from as low as Rs 26 crore to Rs 98 crore, never crossing Rs 100 crore and clearly inadequate to service its debt. Not surprisingly then it reported an average annual loss of Rs 274.73 crore.

Despite these losses, the external debt, mostly from mutual funds, rose to Rs 3,234 crore at the end of March 2018 from Rs 278 crore as of March 2013.

As on March 2018, 11 mutual funds had subscribed to debentures of Rs 2,325 crore, according to MCA filings. Aditya Birla Sun Life Asset Management Co. had the largest exposure worth Rs 1,500 crore.

Edisons Infrapower & Multiventures

Edisons had a total debt of Rs 995.05 crore as of March 2013, which rose to Rs 1,229.78 crore in five years. Mostly due to rising finance costs. Mutual funds helped the promoter replace related-party debt, that declined from Rs 940 crore to Rs 631 crore.

In the five years that mutual fund exposure to the company’s debt went from zero to Rs 400 crore, revenue averaged Rs 18 lakh per annum. The average annual loss of the company in the last five years was Rs 56.66 crore.

As on March 2018, 20 schemes of three mutual Fund house had exposure to debentures of Rs 400 crore.

Konti Infrapower & Multiventures

Konti had a total debt of Rs 849.57 crore at the end of March 2013, which increased to Rs 1,172.74 crore in five years. Again, mostly due to rising finance costs. Here too mutual funds helped replace related-party debt. It declined from Rs 849 crore to Rs 653 crore.

In that five-year period Konti earned minimal revenue from its investments—an average annual revenue of just Rs 4.36 crore. Whereas average annual loss was Rs 36.98 crore in the same period, due to high finance costs.

As of March 2018, 16 schemes of two mutual funds had an exposure to debentures of Rs 275 crore.

Interestingly, the debentures raised by these Essel Group entities have been assigned ratings of ‘A’ or above in the last three years. They were all rated by Brickwork Ratings agency. But each rating rationale carried this note:

“However, the rating is constrained by unavailability of assured cash flows of the issuer at redemption, and dependency on the group support, refinance or alternatively liquidation of securities before the redemption due date to meet the obligations arising from the proposed NCD issue.”

Brickwork’s ratings seem to have relied on the underlying of pledged shares of Zee Entertainment and Dish TV. That’s the explanation mutual funds use as well to defend their loan making. They’ve also negotiated an additional payout based on the premium the promoter gets in the Zee Entertainment stake sale.

Investors and lenders have given eight months to the Essel Group to sell its stake in Zee Entertainment. “As a part of this agreement, it has been decided that any profit that the promoter earns on the sale of its stake, 6 percent of it will accrue to lenders in the form of coupon,” Balasubramanium said. “The base price for computing profit is decided at Rs 350 or so.”

An Essel Group spokesperson, in an emailed reply to BloombergQuint, reiterated that it will repay mutual funds by monetising Essel Group’s infrastructure assets, including roads, transmission and solar, and it has made steady progress.