Vodafone Idea Rating Downgrade What should investors of UTI, Aditya Birla SL, and Nippon MF do?
Jan 31, 2020

Author: Divya Grover

Vodafone-Idea Rating Downgrade: What should investors of UTI, Aditya Birla SL, and Nippon MF do?
(Image Source: photo created by yanalya - www.freepik.com)

Last week I wrote on why Franklin Templeton mutual fund's (FTMF) decision to completely mark down its exposure in debt securities of Vodafone-Idea (VIL) was perhaps in the best interest of the investors, instead of waiting for an affirmation from rating agencies. At the same time, FTMF had restricted fresh inflows into the affected schemes in the interest of existing investors.

It was expected that other AMCs with significant exposure to VIL debt viz. UTI AMC, Aditya Birla SL AMC, and Nippon AMC may follow suit and mark down the exposure.

In a note, UTI AMC said that in order to protect the interest of unitholders, it has decided to value the non-convertible debentures (NCDs) of Vodafone Idea at the lower of the two prices provided by the valuation agencies with effect from January 17, 2020.

Nippon AMC issued a similar note that said, "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 per cent to face value. On subsequent dates, it has been further revalued, and the current valuation is at 35 per cent to face value".

Aditya Birla SL AMC too marked down its exposure to some extent.

Consequently, a day after the Supreme Court (SC) rejected telcos review petition on AGR dues, other AMCs witnessed drop in value of their holdings.

Table: Schemes affected by Vodafone-Idea witness drop in NAV

Scheme Name Dec-19
Holding (%) Market value (Cr) NAV change (%) Jan 17, 2020
UTI Credit Risk Fund 17.5 253.9 -10.42
Nippon India Hybrid Bond Fund 7.4 102.0 -3.83
UTI Regular Savings Fund 5.6 115.1 -2.70
Aditya Birla SL Regular Savings Fund 3.8 67.3 -1.20
UTI Bond Fund 3.8 16.9 -4.15
UTI Dynamic Bond Fund 3.8 16.9 -1.89
Aditya Birla SL Equity Hybrid '95 Fund 3.3 346.2 -1.02
UTI Medium Term Fund 1.5 3.4 -0.71
UTI CCF - Savings Plan 1.4 50.8 -0.56
Aditya Birla SL Medium Term Plan 1.4 67.1 -0.47
Nippon India Credit Risk Fund 1.2 61.4 -0.36
Aditya Birla SL Short Term Fund 1.1 33.8 -0.37
UTI ULIP 1.0 45.7 -0.49
Nippon India Strategic Debt Fund 0.7 16.0 -0.24
UTI Retirement Benefit Pension 0.6 16.9 -0.17
(Source: ACE MF)

VIL's operating performance continues to be weak. Any payout towards AGR dues would significantly impact its liquidity and affect its future plans.

In view of this uncertainty and its impact on the company's financials, rating agencies CRISIL and India Ratings downgraded VIL's nonconvertible debentures (NCDs) worth Rs 3,500 crore to CRISIL BB and IND BBB respectively, which is below investment grade, while maintaining rating watch with negative implication.

Following this Franklin Templeton MF created side pockets for six of its schemes with exposure to VIL debt. The other three fund houses decided against creating a segregated portfolio despite rating downgrade and are waiting for further developments before taking any decision.

According to UTI AMC, "The company is currently a going concern and has not defaulted on any of its debt obligations to date. It paid interest payment due for the security on January 27, 2020, which will be reflected in the NAVs of the respective schemes."

Aditya Birla SL AMC, UTI AMC, and Nippon AMC are no strangers to side-pocketing. In the past, these fund houses had created side pockets for its exposure in downgraded papers of Adilink Infra & Multitrading, Altico Capital, and Reliance Capital, respectively.

[Read: Are You Holding Debt Mutual Funds With Stressed Assets?]

These AMCs have possibly decided not to segregate its exposure to VIL as the company has not actually defaulted on any payment yet and are hopeful of relief measures in the near future.

It must be noted that telcos are awaiting decision of modification plea to be heard by the SC. The telcos are hopeful of relief measures from the government in the form of deferment of timelines for payment of these liabilities.

However, VIL's stressed operating performance and liquidity pressure due to AGR issue puts it in a tight spot. There is uncertainty about the continuity of its business operation. Thus, the debt papers of VIL, especially those with a longer maturity period, are at higher risk and may see further downgrades.

If investors induce redemption pressure, these fund houses will be forced to sell its high-rated and liquid securities to meet the demand. Consequently, this would have led to increased overall exposure to VIL in the portfolio.

What should investors do?

If you already have exposure to debt mutual fund schemes with exposure to debt instruments of VIL (other than FTMF), you could possibly do away with the ones that would prove perilous to your wealth after conducting a systematic portfolio review.

Keep in mind that various close-ended schemes of Nippon MF have high exposure to VIL. Investors in such schemes will not be able to exit the schemes till the end of maturity period.

It is important for you, as an investor, to approach debt mutual funds with caution and your eyes wide open. Do not assume debt mutual funds, including the one with shorter duration, to be risk-free.

Before investing in debt funds, understand the credit risk involved. If one does not pay attention to the portfolio characteristic of a debt mutual fund scheme, it can result in making the wrong investment choices, leading to erosion of wealth.

That being said, credit risks can randomly knock on doors and avoiding them is almost impossible -- even for a seasoned fund manager or an investment advisor. However, a process-driven approach, less dependence on concentrated exposures (for generating higher returns), and focus on portfolio characteristics can help reduce the risk involved when you choose a debt mutual fund scheme.

Editor's Note: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

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