Mutual Funds Grapple with Altico Capital’s Default

Moneylife Digital Team 13 September 2019

Economy & Nation

Real estate financier Altico Capital India recently defaulted on interest payments of Rs19.90 crore due on 12 September 2019 to Mashreq bank of the United Arab Emirates (UAE). Altico Capital is a non-banking finance company (NBFC) lending mainly to the real estate sector with considerable borrowings from banks and financial institutions, including many mutual funds (MFs).

The NBFC has defaulted on the external commercial borrowing of principal amount of Rs340 crore from Mashreq bank, and is likely to default on its other upcoming dues as well. As per sources, Altico Capital’s total amount of borrowings from banks and financial institutions is ‚4,361.55 crore (as on 12 September 2019). Mutual fund schemes have an aggregate exposure of Rs537 crore to the NBFC’s debt.

The company said, “Our failure to repay the amounts set out above may result in an acceleration of interest repayment and redemption obligations in respect of non-convertible debt securities issued by us and may trigger a default in their timely repayments. We are evaluating options for resolving the liquidity crisis and will be engaging in discussions with various stakeholders for the same.”

Several mutual fund schemes, mostly fixed-maturity plans, have exposure to bonds, debentures of Altico Capital. Because Altico Capital has not defaulted on the bonds held by the fund houses yet, the schemes holding its debt appear unaffected. Also, India Ratings, the agency that rated the debt papers issued by the NBFC, has not published a default rating yet.

However, as per the statement released by the NBFC on its poor financial state, the bonds held by the schemes could also face a default and should be dealt with quickly to avoid huge losses to investors.

It is the ideal time to segregate the debt portion of Altico Capital from the schemes.

This will lock in the extent of loss in the scheme, and prevent mass outflows. This is especially important in open-ended schemes than fixed-maturity plans, as the former can be withdrawn at any time.

Altico was established in 2004 by the funds managed by Clearwater Capital Partners as Clearwater Capital Partners India Private Limited for wholesale lending to capital-constrained Indian small and medium enterprises. In FY15, the company was renamed Altico Capital India Limited, and its business strategy was changed.

On 3 September, India Ratings downgraded the NBFC’s credit ratings for its various debt issuances from “IND AA-” to “IND A+”. Credit ratings of Altico Capital’s commercial papers were also downgraded from “IND A1+”to “IND A1”. Both were given a negative outlook.

The credit rating downgrades were small, and did not signify any grave deterioration in the quality of the debt or the company’s finances.

Importantly, the company’s chairperson Naina Lal Kidwai, who previously worked as chief of HSBC India, also recently stepped down from her year-old post in Altico Capital.

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