CARE Ratings downgraded Vodafone Idea debt to below investment grade rating of BB minus forcing UTI MF and Nippon India MF side-pocket the debt
Over three weeks after Franklin Templeton Mutual Fund side-pocketed Vodafone Idea exposure, UTI Mutual Fund and Nippon India Mutual Fund on Monday bit the bullet and separately announced side pockets in five funds and three funds, respectively, that were exposed to debt of the ailing telecom giant. The side pockets were announced pursuant to the downgrade of the debt instruments of Vodafone Idea by CARE Ratings to ‘BB-‘ (BB minus) i.e. below investment grade, earlier today.
As per UTI Mutual Fund announcement, the side pocket will be created in five funds viz. UTI Bond Fund, UTI Credit Risk Fund, UTI Dynamic Bond Fund, UTI Medium Term Fund and UTI Regular Savings Fund. The market value of Vodafone Idea in the concerned funds was over Rs 180 crore on February 14. Vodafone Idea debt as percentage of net assets of the schemes was highest in UTI Credit Risk Fund (close to 10%), followed by UTI Bond Fund (3.91%), UTI Regular Savings Fund (2.58%), UTI Dynamic Bond Fund (2.48%) and UTI Medium Term Fund (0.69%).
As per Nippon India Mutual Fund announcement, Nippon India Strategic Debt Fund, Nippon India Credit Risk Fund and Nippon India Hybrid Bond Fund will create side pockets. As per disclosure, Vodafone Idea debt in those schemes had face value of Rs 227.30 crore as on February 16, 2020. The percentage of Vodafone Idea debt market value to net assets of schemes was the highest in Nippon India Hybrid Fund (3.15%), followed by Nippon India Credit Risk Fund (0.56%) and Nippon India Strategic Debt Fund (0.37%)
In both cases, the side pockets creation will be done with effect from February 17, 2020 subject to approval from the respective Board of Trustees.
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 Idea). Fund-houses are trying to list the units of segregated portfolio on stock exchange within 10 working days.
Processing of subscriptions and redemptions in the above schemes would be suspended on the day of the credit event (February 17, 2020) till trustee approval for segregation, as per regulatory guidelines. Suspension of processing of subscription/redemption is also applicable to fresh subscription, additional subscription, switch-in, subscription by way of Systematic Investment Plan (SIP) including existing SIPs, Systematic Transfer Plan (STP) including existing STPs or subscription by way on any other mode(s)/facility(ies), full & partial redemption, switch outs and withdrawals through any mode such as Systematic Withdrawal Plan (SWP).
CARE Ratings on February 17 downgraded over Rs 56,000 crore of Vodafone Idea debt facilities/instruments to CARE BB- (BB minus) from CARE BBB- (BBB minus). The revised ratings continue to be on ‘Credit Watch with Negative Implications’.
“The revision in the long term ratings assigned to the various bank facilities/instruments of Vodafone Idea Limited (VIL) takes into account the significant erosion in the overall risk profile of the company while taking into cognisance of the financial impact of no relief being granted on modification plea on 14th February 2020 of telecom companies (telcos) seeking new schedule of Adjusted Gross Revenues (AGR) dues by Hon’ble Supreme Court (SC) and significant losses to the tune of Rs 6,453 crores in Q3FY20. Next date of hearing is on March 17, 2020. Provisions for AGR dues and these losses have resulted in the significant deterioration in the tangible net worth and overall debt protection metrics; leading to sharp erosion in the overall financial risk profile of VIL,” CARE Ratings said.
The Supreme Court has also ordered telcos to clear AGR dues by March 17, 2020 and instructed the Department of Telecommunications (DoT) to withdraw their executive orders on no-coercive action against telecom players for unpaid AGR dues. Vodafone Idea has to pay over Rs 50,000 crore but has so far offered to pay a total of Rs 3,500 crore due to financial crunch.
“The ratings also factor in weakening of financial support to VIL from its promoters (both Vodafone Plc. and Aditya Birla Group) in the near term owing to significant competitive pressure in the telecom industry. Along with these, any further delay in the monetisation of its tower business housed in Indus Towers Limited and fibre assets, are likely to put further strain on the liquidity profile of the company. The ability of VIL to raise funds and manage the financial liability arising out of the AGR dues remains a key monitor-able,” said CARE Ratings.
The ratings continue to be further constrained due to the elevated debt level, declining trend of subscriber base, technology obsolescence risk and prevalent intense competition in Indian Telecom industry. The competition has adversely impacted the operating performance of the company and will continue to remain as a key rating sensitivity.
Aditya Birla Sun Life MF is the another fund-house with Vodafone Idea exposure in four schemes that had a market value of over Rs 500 crore as on Dec-2019 end. Any information on side pocket creation will be updated when RupeeIQ receives it.
The Board of Trustees of Franklin Templeton Mutual Fund had earlier approved the creation of segregated portfolios (side pockets) in six 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 with effect from January 24, 2020.
CRISIL had downgraded Vodafone Idea debt to BB- (BB minus) on January 24. Interestingly, these securities were already marked down to a value of zero by Franklin Templeton on January 16, 2020.
Why UTI, Nippon and Aditya Birla Sun Life MF haven’t side pocketed Vodafone Idea debt yet
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Franklin Templeton MF creates side pockets in 6 debt schemes that wrote down Vodafone exposure to zero
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