Franklin Templeton Mutual Fund Marks Down Vodafone Idea Debt
Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Franklin Templeton Mutual Fund Marks Down Vodafone Idea Debt

Debt exposure of mutual funds again came into the spotlight after Franklin Templeton Mutual Fund marked down its investments in Vodafone Idea Ltd. as the telecom operator failed to get any relief on pending dues.

Mutual funds have a total exposure of about Rs 3,390 crore in Vodafone Idea, of which Franklin Templeton accounts for nearly 62 percent, according to Morningstar Inc. The fund house marked down its exposure in the stressed telecom operator, leading to a 4-7 percent drop in net asset value for its schemes.

“Debt securities of Vodafone Idea held in the schemes of Franklin Templeton have been marked down to zero,” Franklin Templeton said in a statement uploaded on its website. “The valuation adjustment 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”.

Also, fresh inflows in the scheme have been limited to Rs 2 lakh per day per fund per investor, until further notice, it said.

Vijai Mantri, co-founder and chief investment strategist at JRL Money, advised investors not to panic. “What they (Franklin Templeton) did is right in order to protect value for existing unitholders. If this was not done than institutional and HNIs (high net-worth individuals) could have pulled money out, forcing the fund manager to sell other liquid securities and in the process increasing exposure of Vodafone Idea in the portfolio,” he told BloombergQuint.

Also, the asset management company, according to Mantri, has done the right thing by restricting its future buying. That will restrict “opportunistic money taking advantage” of immediate future gains. “If things settle down, then NAV will be marked up. If investors redeem, then it will be a worse thing as they have taken hit of this write-down but will not participate whenever recovery happens and should stay put if they have any money invested.”

Agreed Amol Joshi, founder at PlanRupee Investment Services. In absence of any ratings downgrade, a voluntary valuation markdown is essentially done to protect small unit-holders, just in case “nimble-footed” large investors head towards exit anticipating further trouble in Vodafone Idea’s debt, he said.

This measure and fresh investment restrictions will mean better chance of recovery to existing unit-holders as and when it happens, he said, adding that a lesson for investors is to always follow asset allocation even within an asset class.

“In this case, debt investments should be allocated in—short-term liquid assets, medium-term high-rated (AAA) exposure and managed (low) credit to the extent permissible as per risk appetite,” Joshi said.

UTI Asset Management Co. Ltd. too has marked down its investments in Vodafone Idea.

“UTI AMC has decided to value the NCDs of Vodafone Idea Ltd. at the lower of the two prices provided by the valuation agencies (CRISIL and ICRA) with effect from Jan. 17, 2020. UTI AMC would review the valuations based on future developments and keep the investors informed,” the fund house said in a statement.

Ratings agencies CRISIL Ltd. and ICRA Ltd. have been appointed by Association of Mutual Funds in India for providing day-end valuation of debt securities.

Investors of debt funds have been worried following concerns over the quality of corporate debt over the past year and a half. First, surprise payment defaults of IL&FS Group subsidiaries triggered a credit crunch, especially among non-bank lenders, forcing most mutual funds to write off their investments in the infrastructure conglomerate’s securities.

Then, standstill agreements over shares pledged by Zee and Anil Ambani-controlled companies, and financial stress of Dewan Housing Finance Corporation Ltd. amplified concerns over such investments.

Now, the Supreme Court’s ruling that telecom operators will have to include non-core revenue to calculate levies raised questions about Vodafone Idea’s ability to repay debt.

Vodafone Idea has debt worth more than Rs 1 lakh crore in its books. The company owes an estimated Rs 44,150 crore in adjusted gross revenue dues to the government, of which Rs 8,400 crore is to be paid by parent Vodafone Plc.

On Friday, Vodafone Idea shares fell 25.83 percent to Rs 4.45 apiece on the NSE while the benchmark Nifty 50 shed 0.03 percent to end the day at 12,352.35.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.