Franklin Templeton MF remains the sole fund-house to have bitten the bullet by creating side pocket for Vodafone Idea holdings
While Franklin Templeton Mutual Fund has created side pockets in six of its debt schemes with Vodafone Idea exposure, the three other fund houses with exposure to the telecom company’s debt i.e. UTI MF, Nippon India MF and Aditya Birla Sun Life MF have still not gone down the same path.
While side pocketing by a fund-house is not mandatory and is at the discretion of the fund-house, ratings company CRISIL on January 24 downgraded debt of the Vodafone Idea to ‘BB’, which is below-investment grade, possibly forcing Franklin Templeton MF’s hand on this play.
The rating action was meant to be a reflection of CRISIL’s expectation of a significant deterioration in Vodafone Idea’s financial risk profile on account of the potential payout against the adjusted gross revenue (AGR)-related liability, to be payable shortly.
As per regulatory norms, a fund house can segregate portfolios, or create a side pocket, when the rating of an exposed debt issuer company goes below investment grade. While Franklin Templeton MF has valued Rs 2,000-crore worth Vodafone Idea debt at zero, UTI MF, Nippon India MF and Aditya Birla Sun Life MF continue to ascribe some value to the same debt, though they too have marked down the debt by some extent.
Valuation agencies also don’t value Vodafone debt at zero. Franklin Templeton’s zero valuation only reflects what it thinks is the realisable price of the relevant securities on the date of valuation. This is a bone of contention between Franklin and others.
As many as 10 schemes of UTI MF have Vodafone Idea debt exposure, worth Rs 551 crore as on Dec-2019. “In view of the potential developments in the week of January 27-31, 2020, UTI AMC has decided not to segregate the instruments of Vodafone Idea Ltd,” said a note by UTI Mutual Fund. In fact, the fund-house argues that Vodafone is currently a going concern and has not defaulted on any of its debt obligations to date. UTI MF even confirmed that the company paid interest payment due for the security on January 27, 2020. The earliest maturity date for Vodafone Idea debt held by UTI MF is on July 10, 2020.
Vodafone Idea has to pay over Rs 53,000 crore in AGR dues, but a significant loss of more than 11 crore subscribers over the 12 months through September 2019 and insufficient existing liquid resources has meant that the possibility of it shutting operations if asked to pay the entire AGR liability is very real. In fact, chairman of Vodafone Idea Kumar Birla had earlier mentioned that the telco would shut operations if asked to pay the entire AGR liability.
There are 16 schemes of Nippon India MF that hold Vodafone Idea debt worth Rs 240 crore as on Dec-2019. “Immediately post the dismissal of the review petition on AGR judgement, given the materiality of the same on the company’s financials (including debt sustainability), the security was valued at 42.50% to face value. On subsequent dates, it has been further revalued, and the current valuation is at 35% to face value,” said a note by Nippon India MF.
Though there is no information with RupeeIQ about a note from Aditya Birla Sun Life MF on Vodafone Idea debt in particular, the fund-house has not side pocketed that exposure in any of its four schemes that are exposed. That debt had a market value of over Rs 500 crore as on Dec-2019 end.
Of course, the way Franklin Templeton MF has handled this debt exposure can, by no means, can be considered an ideal one.
Franklin has taken an extremely cautious approach right from the day when it sent shockwaves by marking down nearly Rs 2,000-crore market value of Vodafone debt held in its schemes to zero. This happened on 16 January 2020, soon after the Supreme Court dismissed pleas, including those of Bharti Airtel and Vodafone Idea, to review its earlier judgement that had asked telecom operators to pay over Rs 1 lakh crore in dues to the government. The massive markdown by Franklin led to each of the six Franklin schemes taking a 4-7% net asset value negative impact individually.
MF investors should note that UTI MF, Nippon and Aditya Birla Sun Life MF are no stranger to side pocketing.
Reliance Mutual Fund has also side pocketed exposure to Reliance Capital.
Aditya Birla Sun Life MF has side pocketed its exposure to Adlink Infra and Multitrading Pvt Ltd, an Essel group company.
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