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Good News for JP Morgan Debt MF Holders, They Have Sold The Amtek Auto Debt at a Haircut

Why should mutual fund holders care that a vulture fund has bought the bonds of a beleagured auto company at a discount? The answer: because their mutual fund has managed to sell those bonds, even if at a discount, and instead of being locked out of their own money, the mutual fund holders see some money back.

The history:

A tweet from Manoj Nagpal brought this issue back to the fore:

The mutual fund itself has issued a letter so cryptic that it would take you years to know that they had done something.

Notice is hereby given to inform the Unit Holders of the Units – Segregated Asset that the Asset Management Company has sold the Segregated Asset in full on December 5, 2015 and this has resulted in realization of the Segregated Asset thereby providing liquidity in relation to the Segregated Asset.

Anyhow, this is what it means:

  • JPMorgan MF has sold the bad bonds, apparently to a “vulture” fund (nothing wrong with vultures, so it’s not a bad thing)
  • We don’t know how much for, but the number doing the rounds is that for every Rs. 100 worth of bonds, they’ve got 85
  • We’ll know at the end of the day looking at the NAV
  • The current assumption is that the bonds will get Rs. 75 for every Rs. 100, so if the 85% number is true, it’s a lesser haircut than assumed. So the NAV will go UP.  (The current NAV is 10) If the 85% number is true, it will become Rs. 11.09 per unit.
  • Remember these bonds were 15% of one fund and about 4% of another fund, so the total impact is much lower (2.25% and 0.6% losses effectively)

This is good for many holders – which apparently include the promoters of Hero Motocorp and the startup Oyo Rooms.

Even a 15% haircut means at least you got some money back. But let’s see how much the hair cut really is.

Update: Both bonds have listed at 11.08/11.09 NAV. That means a 16.8% discount was given to the bonds. (The bonds were given a 25% discount and listed at Rs. 10. If they are now at 11.09 after the sale, that means the actual sale value was at 83.2%, implying a discount of 16.8%)

More on Amtek: Banks to Blame?

Tamal at Livemint says the issue is of incompetence at the bank levels – could the bankers have done things better?

Out of a total Rs.21,134 crore debt, international businesses’ exposure to lenders was only 7%.

Simply put, by using the Indian banking system, Amtek has built its international business. But its lenders do not get the benefit of the cash flows from the international business as they have been ring-fenced. How?

In November 2014, Amtek Global Technologies (AGT), the holding company for international businesses, entered into a credit arrangement with KKR & Co. Lp under which KKR provided AGT with €235 million of long-term financing. While doing so, KKR restricted Amtek and AGT from making any repayment to its group entities and or any other payment to Indian entities. These details were not disclosed to lenders in India, coming to light only when Amtek was facing a cash crunch leading to delayed payment of interest and principle dues to Indian lenders, beginning April 2015.

Or, put another way, Amtek Auto has set itself up so that it has funded its growth abroad by borrowing from Indian banks, and then it’s used those foreign subsidiaries to borrow further more money abroad. And there, companies like KKR that lent to the subsidiary don’t allow it to pay back any money to the Indian owner.

Meanwhile, they are trying to sell the German arm, and Bharat Forge and Mahindra CIE are looking to buy. Amtek’s subsidiary Castex’s shares are in the dumps (down 95% from a recent peak) but the others – JMT Auto and Metalyst Forgings – are showing signs of moving back up strongly. Is this really a recovery or just another rumour filled round that will take all these stocks into the dumps again?

The fact that someone was willing to pay 85% for the Amtek bonds probably means there is a lot more than we know right now. A vulture fund won’t pay 85% unless it’s dead sure of recovery within a year. (unless JP Morgan is somehow paying this off its own pocket) We’ve argued that the company Amtek Auto is unlikely to give more collateral to satisfy the vulture buyer’s risk appetite. So what’s happened to bring in this level of confidence? We’ll keep our eyes open.

Note: See how quickly you can rejoice at the return *of* your money, after worrying so much about the return *on* your money?