UTI MF, Nippon India MF side pocket Vodafone Idea exposure of Rs 413 cr

The company also managed to arrest the rapid ARPU decline, with their minimum value recharge and bundled plan offering

Two mutual fund houses, UTI MF and Nippon India MF, have side-pocketed their exposures to Vodafone Idea in a bid to prevent the distressed assets from damaging the returns generated from more liquid and better-performing assets.

The move comes following a rating downgrade of Vodafone Idea debt by CARE Ratings to 'BB-', which is below the investment grade.

In a statement, UTI AMC said its board of trustees approved the creation of segregated portfolio in five schemes -- UTI Credit Risk Fund, UTI Bond Fund, UTI Regular Savings Fund, UTI Dynamic Bond Fund and UTI Medium Term Fund.

"With effect from February 17, 2020, securities of Vodafone Idea Ltd will be segregated from total portfolio," it added.

These five schemes have exposure of Rs 186 crore in debt instruments issued by Vodafone Idea.

Nippon India MF, separately, said it has decided to create segregated portfolio of securities (or side pockets) of Vodafone Idea held in three schemes -- Nippon India Strategic Debt Fund, Nippon India Credit Risk Fund and Nippon India Hybrid Bond Fund -- from Monday (February 17) to protect the interest of the investors.

The fund house has an exposure of a little over Rs 227 crore to Vodafone Idea debt across these three schemes.

"In light of no further relief and the Supreme Court's reiteration of the requirement to make the payment imminently, the company's operations are likely to become unviable unless there is significant equity infusion," Nippon India said in a note to investors.

"The promoters of VIL (Vodafone Idea Ltd) have hinted that they will be unable to continue the operations of the company on a going-concern basis unless there is meaningful relief on the AGR dues," it added.

Last month, Franklin Templeton MF side-pocketed exposure to the telecom player after rating agencies had downgraded the non-convertible debentures of Vodafone Idea to below investment grade.

Prior to that, Franklin Templeton MF, which had an exposure of over Rs 2,000 crore to Vodafone Idea in six of its schemes, had marked down its investment in the securities issued by the telecom player to zero.

The fund house had markdown the schemes on the same day when the Supreme Court rejected the telecom player's review plea related to over Rs 40,000 crore in adjusted gross revenue (AGR)-related dues to the government.

In December 2018, regulator Sebi had permitted mutual funds to create segregated portfolios, or side-pocketing, with respect to debt and money market instruments. In case of a credit event that is a credit downgrade, like below investment grade and similar, segregated portfolio may be created.

Creation of segregated portfolios is a mechanism to separate distressed, illiquid and hard-to-value assets from other more liquid assets in a portfolio.

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