Sunday, January 18, 2009

Mutual Funds turn sympathetic towards Unitech

Mutual funds, over time, have become sympathetic to Gurgaon-based realt estate company Unitech Ltd. Though the company will have to repay debt to the tune of Rs 1,100 crore to mutual funds over the next one week, there are many magnanimous fund managers out there who are willing to rollover the debt for some more time.
"Most funds have invested into asset-backed papers. Moreover, if there is rollover of debt, investors stand to gain significantly from increased yields (anywhere between 14 and 16%). Considering Unitech's large asset bank, a default is simply out of question," said the CEO of a domestic fund house.
According to a survey conducted by Matrix Financial Services, various mutual fund schemes have an exposure of over Rs 1,433 crore in Unitech Ltd, through several debt papers issued by the company. Several schemes of Reliance MF, HSBC MF and Sundaram BNP Paribas MF have exposure (to Unitech debt) in the range of Rs 50 crore and Rs 300 crore.
"Unitech does not have a credit problem; it is only constrained by a severe liquidity crunch. From what we understand, the company is ready to pay 40% of the money due to mutual funds in the coming week. We are ready to rollover the remaining 60% for another 20 days or a month," said the fixed income manager of a fund house attached to a PSU bank.
Close to downgrading Unitech's long-term rating to 'B (Ind)' from 'BBB (Ind)' about a week ago, Fitch Ratings, on Wednesday, downgraded Pass Through Certificates (PTCs) that are directly linked to the rating company's national long-term and short-term ratings of Unitech Ltd.
The downgrade signals the company's continued delay in raising the required funds as earlier projected and increasing uncertainty regarding its ability to service its interest cost and fulfil its immediate debt payment obligations.
"In case, there is a potential payment delay on account of liquidity issues expected from an issuer of a bond in a fund's portfolio, one of the ways this kind of challenge is temporarily met is by replacing the bond with another instrument of the same issuer. However, this would affect the cashflow position of the fund," Crisil fund service head Krishnan Sitaram.
If there is a redemption request at that time, the options of meeting that can then be by selling that security or some other security in the portfolio or by availing of a bank loan, Mt Sitaram added.
The company has convened an EGM on January 19 to discuss various nagging issues. According to mutual fund sources, the company is also meeting a couple of banker on January 16 and 17 to decide on loan restructuring.
"We'll be comfortable with a rollover. Many of our investors are willing to reinvest in fresh short-term paper issued by Unitech. Many will also be looking to invest in other debt plans. I guess, there wouldn't be a big repayment issue," said the debt fund manager of a Mumbai-based fund house.
Given the weak operational cashflows, the company will resort to asset sales or debt restructuring over the near-term. According to a BNP Paribas report, forced asset sales in the current environment could further erode equity value. Management indicated that it is in the process of raising Rs 800 crore to tide over the near-term liquidity crisis. Failure to do so could lead to forced sale of underlying assets - primarily land, the report said.

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