UTI MF to side-pocket Zee Learn debt exposure

UTI Mutual Fund (MF) has decided to side-pocket exposure to Zee Learn (ZLL) in two of its schemes — UTI Credit Risk Fund and UTI Medium Term Fund — after the company’s debt papers were downgraded to below investment grade on Tuesday.

As of July 6, UTI Credit Risk had 9 per cent (~40.77 crore) of its assets exposed to the Essel Group company. The medium-term fund had 3.02 per cent exposure (~3.4 crore).

CARE Ratings in its note observed according to the structure, ZLL was to pay the obligations related to non-convertible debentures (NCDS) at least 30 days before the due date, and in case of payment shortfall, Zee Entertainment Enterprises (ZEEL) would pay the balance amount into the debt service reserve account (DSRA) at least seven days before to the due date (July 2).

“However, owing to severe constraints in operational cashflows, ZLL has not funded the DSRA account to date. As of July 2, 2020, ZEEL also had not funded the DSRA account,” it said. As a result of non-adherence to the structure, and nonfunding of the shortfall in NCD obligations, the rating agency said it would no longer give the benefit of credit enhancement to the NCDS. The downgrade from Aa-credit enhancement to the revised rating of B with negative outlook also factors in the likelihood of a default on NCD payments.

Even as it favourably factored in the long-standing experience of promoters, strong brand recognition in the education sector, the rating agency took cognizance of the company applying for a moratorium on term loan repayment and working capital facilities with its banks as a Covid-19 relief measure, permitted by the Reserve Bank of India.

While UTI Credit Risk has 9% exposure, the Medium Term fund has 3.02% exposure