Background
On 15th Jan, 2020, the Supreme Court rejected the petitions filed by telecom operators to review the October 24, 2019 verdict that provided three months' time to clear AGR (Adjusted Gross Revenue) dues.
As expected the telecom operators (excluding Reliance Jio) missed the 24th Jan, 2020 deadline to pay the dues. Telecos are finding it extremely difficult to meet the payment timeline given the large quantum of dues and are hoping for relief measures from the government.
The Supreme Court is likely to list the modification appeal filed by the telcos against the deadline for their statutory dues on 3rd Feb, 2020, as per Apex Court's notification stated on 30th Jan, 2020. We cannot speculate on what the Apex Court verdict will be, soon it will be known to all.
Corporates have defaulted on their obligations towards mutual funds even in the past.
Some of the names that come to mind are those of Ballarpur Industries, Amtek Auto, and Jindal Steel & Power. But the recent spate of defaults, including names like IL&FS, ESSEL Group, Dewan Housing Finance Corporation, Reliance-ADAG, Altico Capital, Sintex BAPL etc.
Even Life Insurance Corporation (LIC) has an exposure of more than Rs 20,000 crore to various entities’ debt instruments that have been downgraded to the default category by credit rating agencies.
The exposure, which is for the period ended September 2019, is across various platforms such as life funds, pension funds, and unit-linked funds.
AGR Dues
VIL owes AGR dues of over Rs 50,000 crore to the government. VIL Chairman Kumar Mangalam Birla had earlier stated that they will have to shut shop if the Centre does not provide any relief. This puts VIL at a greater risk of default and rating downgrade.
Among other telecom operators, Bharti Airtel has better chances of survival and the ability to compete with Reliance Jio. Bharti Airtel recently raised Rs 21,240 crore through QIP (Qualified institutional placement) and FCCB (Foreign currency convertible bonds). It proposes to utilise the proceeds for any payments that may be required to be made towards AGR dues.
Franklin Templeton MF's Write-down & Side Pocketing of Exposure to Voda-Idea Debt
Franklin Templeton has the highest exposure among mutual funds to the debt papers of VIL. Other AMCs like UTI Asset management Company, Aditya Birla Sun Life AMC, and Nippon India Life Asset Management with significant exposure to VIL debt may follow suit and mark down the exposure.
In the past FTMF had exposure to toxic papers of Reliance ADAG and Jindal Steel and Power. It seems FTMF has taken a leaf from the IL&FS crisis and decided not to rely heavily on credit rating or wait for the securities to be downgraded to junk rating.
The move by FTMF is perhaps in the best interest of the investors and the AMC is well within rights to mark-down its exposure rather than waiting for an affirmation from rating agencies.
The schemes would have faced huge redemption pressure in case of rating downgrade and FTMF would have been 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.
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.
What are the stances of Aditya Birla SL AMC, UTI AMC, and Nippon AMC?
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.
As per our understanding 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.
What should the investors do?
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 & have a clarity by consulting an advisor.
As the professional financial advisor has to pay attention to the portfolio characteristic of a debt mutual fund scheme or else it can result in making the wrong investment choices, leading to erosion of your wealth.
As an investor or an advisor it must be clearly understood that, credit risks can randomly knock on doors and avoiding them is almost impossible -- even for a seasoned fund manager or a financial advisor.
We at Master Mind Financial Advisory believe in opting for a fund house whose focus is up on process-driven approach, less dependence on concentrated exposures (for generating higher returns), and focus on portfolio characteristics can help reduce the risk involved while choosing a debt mutual fund scheme.
For case by case discussion of investments into mutual funds suggestions would vary. Feel free to be in touch with us.
On 15th Jan, 2020, the Supreme Court rejected the petitions filed by telecom operators to review the October 24, 2019 verdict that provided three months' time to clear AGR (Adjusted Gross Revenue) dues.
As expected the telecom operators (excluding Reliance Jio) missed the 24th Jan, 2020 deadline to pay the dues. Telecos are finding it extremely difficult to meet the payment timeline given the large quantum of dues and are hoping for relief measures from the government.
The Supreme Court is likely to list the modification appeal filed by the telcos against the deadline for their statutory dues on 3rd Feb, 2020, as per Apex Court's notification stated on 30th Jan, 2020. We cannot speculate on what the Apex Court verdict will be, soon it will be known to all.
Corporates have defaulted on their obligations towards mutual funds even in the past.
Some of the names that come to mind are those of Ballarpur Industries, Amtek Auto, and Jindal Steel & Power. But the recent spate of defaults, including names like IL&FS, ESSEL Group, Dewan Housing Finance Corporation, Reliance-ADAG, Altico Capital, Sintex BAPL etc.
Even Life Insurance Corporation (LIC) has an exposure of more than Rs 20,000 crore to various entities’ debt instruments that have been downgraded to the default category by credit rating agencies.
The exposure, which is for the period ended September 2019, is across various platforms such as life funds, pension funds, and unit-linked funds.
AGR Dues
VIL owes AGR dues of over Rs 50,000 crore to the government. VIL Chairman Kumar Mangalam Birla had earlier stated that they will have to shut shop if the Centre does not provide any relief. This puts VIL at a greater risk of default and rating downgrade.
Among other telecom operators, Bharti Airtel has better chances of survival and the ability to compete with Reliance Jio. Bharti Airtel recently raised Rs 21,240 crore through QIP (Qualified institutional placement) and FCCB (Foreign currency convertible bonds). It proposes to utilise the proceeds for any payments that may be required to be made towards AGR dues.
Franklin Templeton MF's Write-down & Side Pocketing of Exposure to Voda-Idea Debt
Franklin Templeton has the highest exposure among mutual funds to the debt papers of VIL. Other AMCs like UTI Asset management Company, Aditya Birla Sun Life AMC, and Nippon India Life Asset Management with significant exposure to VIL debt may follow suit and mark down the exposure.
In the past FTMF had exposure to toxic papers of Reliance ADAG and Jindal Steel and Power. It seems FTMF has taken a leaf from the IL&FS crisis and decided not to rely heavily on credit rating or wait for the securities to be downgraded to junk rating.
The move by FTMF is perhaps in the best interest of the investors and the AMC is well within rights to mark-down its exposure rather than waiting for an affirmation from rating agencies.
The schemes would have faced huge redemption pressure in case of rating downgrade and FTMF would have been 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.
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.
What are the stances of Aditya Birla SL AMC, UTI AMC, and Nippon AMC?
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.
As per our understanding 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.
What should the investors do?
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 & have a clarity by consulting an advisor.
As the professional financial advisor has to pay attention to the portfolio characteristic of a debt mutual fund scheme or else it can result in making the wrong investment choices, leading to erosion of your wealth.
As an investor or an advisor it must be clearly understood that, credit risks can randomly knock on doors and avoiding them is almost impossible -- even for a seasoned fund manager or a financial advisor.
We at Master Mind Financial Advisory believe in opting for a fund house whose focus is up on process-driven approach, less dependence on concentrated exposures (for generating higher returns), and focus on portfolio characteristics can help reduce the risk involved while choosing a debt mutual fund scheme.
For case by case discussion of investments into mutual funds suggestions would vary. Feel free to be in touch with us.
Warm Regards,
Varun Vaid
Varun Vaid
+91-9814612907
+91-0172-4623907
E-mail: director@mmfa.in; operations@mmfa.in
Twitter: @vaid_varun; @MMFA_IN
+91-0172-4623907
E-mail: director@mmfa.in; operations@mmfa.in
Twitter: @vaid_varun; @MMFA_IN
