Franklin Templeton Gets Rs 1,252 Crore On Side-Pocketed Vodafone Idea Bonds

Franklin Templeton Mutual Fund received Rs 1,252 crore as Vodafone Idea Ltd. repaid holders of junk-rated non-convertible debentures that matured on Friday.

The asset manager at the end of January side-pocketed its exposure to Vodafone Idea amid doubts about the telecom operator's ability to honour its obligations after the debt instruments were downgraded below the investment grade. Side-pocketing allows mutual funds to segregate stressed debt from the portfolio and investors are paid as and when the asset management company receives payments from the issuer.

Besides the annual interest payment received on June 12 against Vodafone Idea's 8.25% NCD maturing on July 10, Franklin Templeton has now received the full value of the principal due along with interest for June 12 to July 9, according to its statement.

The funds went to six fixed income funds that the asset manager wound up in April citing liquidity pressure. Most of the bonds were held by Franklin India Ultra Short Bond Fund, which has received a payment of Rs 803.79 crore from Vodafone Idea.

“This is positive from two perspectives,” said Vijai Mantri, co-founder and chief investment strategist at JRL Money. “First, the entire exposure to Vodafone Idea had been written down to zero by Franklin Templeton in January and now they have received this payment. Secondly, this was part of a segregated portfolio when the six schemes were wound up by Franklin Templeton.”

Investors who held units in the six Franklin Templeton schemes when the NCDs were side-pocketed will receive the proceeds, Mantri said. “I wouldn’t be surprised if unitholders receive the funds in their accounts by Monday."

Any proceeds received in the wound up schemes can't be distributed to unitholders because of a stay by the Gujarat High Court on the e-voting process required to wind up the schemes. But the segregated portfolio is not part of the schemes and is out of the purview of the stay.

Franklin Templeton owed investors more than Rs 28,000 crore when it wound up the schemes. But net assets have since fallen to Rs 25,000 crore after paying lenders and also because the value of some of the debt securities held declined.

The asset management company is recovering dues in the six schemes to repay unitholders but it anticipates the process to be completed by 2025.

The payment received by Franklin Templeton is on one of two Vodafone Idea bonds. The second bond is due in 2023 but the mutual fund has a put option that will allow for an early redemption in September 2021.

According to the 2019 annual report of Vodafone Idea, the total outstanding amount due on this bond was Rs 1,500 crore. In January, when Franklin Templeton wrote down the value of Vodafone Idea’s bonds, its total exposure to the company’s bonds was Rs 2,074 crore, meaning it's yet to receive around Rs 820 crore.

Other Mutual Funds Benefit

Other mutual funds holding the 8.25% Vodafone Idea bond also received the repayment due today, a spokesperson for Vodafone Idea told BloombergQuint over the phone.

According to Vodafone Idea’s 2019 annual report, the total outstanding on the bonds maturing today was Rs 2,800 crore. Nippon India Mutual Fund received all its outstanding amount of Rs 121 crore, its spokesperson said. An official of UTI Mutual Fund said on the condition of anonymity that the fund house received Rs 161 crore from Vodafone Idea.