Franklin Templeton MF creates side pockets in 6 debt schemes that wrote down Vodafone exposure to zero

Move comes a day post CRISIL downgrading debt securities of cash-starved Vodafone to below investment-grade

Kumar Shankar Roy Jan 25, 2020

Mutual Funds side pocketThe Board of Trustees of Franklin Templeton Mutual Fund has approved the creation of segregated portfolios (side pockets) in six debt schemes viz. Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.

As per a press statement, with effect from 24 January 2020, various securities issued by Vodafone Idea Limited, in the above-mentioned schemes, will be segregated from the total portfolio.

“This decision has been taken in order to protect value for existing unitholders in these schemes. These securities have already been marked down by us to a value of zero, on 16 January 2020,” Franklin Templeton MF said in a statement.

Also read: What is Side Pocket? Can it help investors of funds stuck with illiquid assets?

With the side pocket now effective, the schemes separate their portfolios into the good portion, consisting of investment grade bonds, and the bad portion comprising the downgraded bond (Vodafone). The NAV of the schemes will be carved out to the extent of the value (after write down) of the bad bond. All existing investors in the scheme will receive one new unit in the side-pocketed portfolio in addition to existing units in the scheme.

Six schemes of Franklin Templeton Mutual Fund have written down the debt worth Rs 2,000 crore given to Vodafone Idea. The write-off has led to each of the Franklin schemes taking a 4-7% net asset value negative impact individually.

In the schemes, the fund-house has already limited fresh investments to Rs 2 lakh per day per fund per investor, till further notice. This limit is imposed only on the new applications received after the cut-off time on 16th January 2020.

On the company valuing the exposure to zero, Franklin Templeton MF said it would like to reiterate that this fair valuation only reflects the realisable price of the relevant securities on the date of valuation and does not indicate any reduction or write-off of the amount repayable by Vodafone Idea Limited.

The fund-house said it will continue to engage with the Vodafone in the best interest of investors.

CRISIL downgrades

On January 24, CRISIL downgraded its rating on the Rs 3,500 crore non-convertible debentures of Vodafone Idea Limited (VIL) to ‘CRISIL BB’ from ‘CRISIL BBB-‘. The rating continues to be on ‘Rating Watch with Negative Implications’.

The rating action reflects CRISIL’s expectation of a significant deterioration in VIL’s financial risk profile on account of the potential payout against the adjusted gross revenue (AGR)-related liability, to be payable shortly. This is despite CRISIL’s expectation that the actual payment towards the AGR-related liability could be lower than the Rs 44,150 crore amount that has been provided for by the company.

CRISIL believes there could be some relief from the Department of Telecommunications (DoT) in the form of deferment of timelines for payment of these liabilities. CRISIL further expects the sponsors to provide financial support in case a significant relief, in terms of amount and timelines, is provided.

RupeeIQ take

Investors in the schemes that have side pocketed have a lot to look forward to. Whenever Vodafone pays back the debt, they can get the upside.

So, existing investors can exit Franklin Templeton schemes now if they want and still hope to get upside when Vodafone pays back the money.

So, if the schemes eventually recover money from the bond, they will get automatically redeemed and you will receive a payout. The trustees of the AMC are supposed to monitor the recovery of proceeds in the side-pocketed bonds.

Additional read:

UTI, Nippon, ABSL MF schemes write down Vodafone Idea exposure after Franklin move

Franklin Templeton Mutual Fund includes side-pocketing provisions in 17 schemes


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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