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Wockhardt Dilemma for Birla Sun Life MF

The problem lies in Wockhardt’s debt obligation

Because Wockhardt is unable to service its debt obligations, Birla Sun Life Mutual Fund is in a quandary as it has to return investors money on schemes that are maturing in the coming days, one of them has already done that on May 5.

The immediately-affected scheme was the Birla Sun Life Fixed term Plan-Series AL, which had matured on Tuesday.

Birla Sun Life’s exposure to the pharma company is indeed large, but the responsible party for the mess that has been created is not the fund house.

First, a bit of history. That Wockhardt Ltd was in trouble was clear amply clear when the company was in the news for passing on the reins of the company to the next generation. Habil Khorakiwala quit as managing director, paving the way for his son Murtaza Khorakiwala to occupy the seat. The move was intended to placate shareholders and send a signal that the board of directors was serious about sorting out the issues that have plagued the company.

Second is the issue involved. Wockhardt got into a serious debt crisis despite having a great run right from 2000 to 2007, with a CAGR of 10.46 per cent. So, what happened?  The answer lies in the ambitious overseas acquisitions which took place during this period that involved the UK-based CP Pharmaceuticals, Ireland's Pinewood Labs, France's Negma Labs, U.S.-based Morton Grove Pharmaceuticals Inc., German firm Esparma and Dumex India.

The firm borrowed heavily to fund these acquisitions and it is now faced with a mounting debt of approximately Rs 3,400 crore. By the end of September 2009, it has to repay the $108 million (Rs 700 crore) of the FCCB loan. Looking at the troubled financials, Wockhardt’s board referred the company to the corporate debt restructuring cell of ICICI Bank. As a saving grace, State Bank of India sanctioned a lifeline loan of Rs 100 crore to help the pharma major meet its working capital requirements.

But elsewhere things were spiralling downwards. Rating agency Fitch downgraded the company’s long-term rating to B (high default risk) from BBB, following the firm's announcement of corporate debt restructuring. Prior to this, CRISIL had downgraded its rating too on the company’s short-term debt programme following a default by Wockhardt on interest payment on a loan. CRISIL downgraded the rating on pass through certificates (PTCs) to P5 from P4 and has placed the rating on 'Rating watch with negative implications'. In light of the current market conditions, liquidity constraints and the firm’s debt burden, the rating agencies do expect a shortfall and delays in meeting loan obligations.

The problems did not end there. Wiser after the accounting fraud at Satyam Computer Services Ltd, Wockhardt’s audit firm did not want to take any chances. Consequently, the firm had to postpone the release of its fourth quarter and annual earnings because the auditors – S Batliboi & Co. - could not finalize the accounts in time. The firm follows a January-December accounting year. Though there appears to be no scam here, the process was apparently delayed as the auditors did not have vital information related to foreign exchange losses incurred by the firm, and some businesses that are likely to be restructured or divested. The results finally were unveiled in

Whether the company manages to save itself, with some adroit manoeuvring, or not is for the future to unfold, but for Birla Sun Life Mutual Fund, the problem has just begun because it will need to pay its investors what it had promised. Increasingly, chances are, that it will look to pay out of its own pockets to ensure its name is not sullied or worse.

Though not many funds are invested in this stock (see: Funds with exposure to Wockhardt), it has been interesting to note that its paper was sought after by debt fund managers (see: Debt lured, not equity). 

No other pharma company was able to court debt fund managers the way Wockhardt did. After the liquidity crisis in October 2008, it was the pharma company with the highest exposure.

From having no exposure to the company in December 2007, debt-fund exposure stood at Rs 194.89 crore by October 2008. HDFC Cash Mgmt Savings alone had an exposure of Rs 44 crore to Wockhardt.

As on February 28, 2009, Rs 81.52 crore worth of Wockhardt paper was held by debt funds. By March 31, 2009, this figure stood at Rs 85.32 crore.

With no silver lining visible in the dark clouds over Wockhardt, Birla Sun Life has chosen the least painful decision, for the moment, at least.

FMPs with an exposure to Wockhardt
Schemes  Amount Invested (Rs cr)  % of AUM  Instrument  Redemption date*
Birla Sun Life FTP Series AL Ret 25.19 25.89 Debt 05/05/2009
Birla Sun Life FTP Series AM Ret 10.95 20.84 Debt 13/05/2009
Birla Sun Life FTP Series AV Ret 42.72 19.9 Debt 02/06/2009
As on March 31, 2009
* approx date of redemption