UTI Mutual Fund side-pockets Zee Learn after downgrade; Rs 44 crore in debt securities stuck

Segregation of portfolio or side pocketing separates stressed assets from other investment and cash holdings of a particular scheme.

UTI Mutual Fund announced the creation of a segregated portfolio in UTI Credit Risk Fund and UTI Medium Term Fund after Care Ratings downgraded debt instruments of Zee Learn. Both the schemes of the UTI Mutual Fund have an exposure of Rs 44.17 crore in the debt securities of Zee Learn.

UTI Mutual Fund said on Wednesday that pursuant to the downgrade of debt instruments of Zee Learn from ‘AA(CE)’ to ‘B’ (below investment grade) by Care Ratings on July 7, 2020, UTI Mutual Fund proposed to create a segregated portfolio in respect of debt securities of Zee Learn in UTI Credit Risk Fund and UTI Medium Term Fund effective from July 7, 2020 subject to approval from the Board of Trustees of UTI Mutual Fund.

Segregation of portfolio or side pocketing separates stressed assets from other investment and cash holdings of a particular scheme. This ensures that while investor money in the debt scheme linked to stressed assets gets locked until the fund recovers money from the stressed company, investors are free to redeem their money from other investments.

The securities of Zee Learn were rated AA(SO) by Care Ratings on March 12, 2015, on the basis of an unconditional and irrevocable undertaking from Zee Entertainment Enterprises (rated Care AA/ A1+ on September 11, 2014) for funding of a Debt Service Reserve Account (DSRA) to cover any shortfall in servicing outstanding obligations of the said securities seven days prior to the due date as per the repayment schedule.

“However, owing to severe constrains in the operational cashflows, Zee Learn has not funded the DSRA account till date. As on July 2, 2020, Zee Entertainment Enterprises also has not funded the DSRA account,” Care Ratings said in its rationale. The fund house will enable listing of units of the segregated portfolio on a recognised stock exchange within 10 working days of creation of the portfolio and enable transfer of such units on receipt of transfer requests.

The rating agency also said that given the non-adherence to the structure, and non-funding of shortfall in NCD obligations by Zee Entertainment Enterprises, Care no longer gives the benefit of Credit Enhancement to the NCDs. “Further, the rating of Care Single B with negative outlook is an unsupported rating which no longer benefits from Credit Enhancement, and factors the likelihood of default in NCDs on July 8, 2020 owing to the severe constrains in the operational cashflows faced by Zee Learn,” said the rating agency.