Troubles faced by the telecom sector can rub-off onto mutual funds

Yields on debt instruments of Vodafone Idea rise following SC ruling

The troubles faced by the telecom sector can rub-off onto mutual funds (MFs), with more than Rs 5,700 crore of MFs' debt investments riding on Vodafone Idea and Bharti Airtel. After accounting for MFs' exposure to Bharti Telecom - the promoter entity in Bharti Airtel - the aggregate debt exposure held by MFs rises to over Rs 9,000 crore.

"The yield on some debt instruments of Vodafone Idea has seen a spike of 350 basis points, with the company's debt facilities receiving a downgrade on Wednesday," said a fund manager, requesting anonymity.

"Spike in yields would lead to mark-to-market losses to schemes holding these debt instruments," he added.

Industry sources say Supreme Court's (SC) recent decision allowing the government to recover around Rs 1 trillion in total adjusted gross revenue (AGR) can put telcos under significant financial stress.

"The telecom sector has already been under heavy debt burden, and the SC judgment compounds the matters for telcos," said a fund manager.

On Wednesday, CARE Ratings downgraded non-convertible debentures (NCDs) of Vodafone Idea to Single A-minus from Single A. The note observed that the liquidity profile of the telecom operator had been adequate with cash and cash equivalents of Rs 21,180 crore before the Supreme Court (SC) judgment.

"... the recent SC order on AGR matter would adversely impact the liquidity profile of Vodafone Idea in near-term," the note pointed out.

While e-mail query sent to Vodafone Idea didn't elicit any response, the company has maintained that it "continues to pay all ... debts as and when these fall due." E-mail query sent to Bharti Airtel didn't elicit any response either.

Following the ruling, Fitch put Bharti Airtel's foreign bond programmes on rating watch. It placed BBB- rating of the company on rating watch negative (RWN). It also placed Bharti Airtel International (Netherlands) BV's senior unsecured bonds and Network i2i's subordinated perpetual bonds on RWN.

The rating agency estimated that Bharti's funds from operations adjusted net leverage could worsen to around 3.1-3.4-times for the financial year ending March 2020 (FY20, from earlier estimate of 2-2.2-times) ... if "the company had to pay entire estimated unpaid dues of $5.9 billion, funded out of debt".

According to analysts, Vodafone Idea can face a more challenging time. "The amounts are material for both Bharti Airtel and Vodafone Idea and places the latter specifically in a very tricky spot, given the massive stress it is already under," a Kotak Securities note said.

It added that while the payouts will increase the leverage ratio for Bharti, the situation is still far more manageable for the company given its relatively better balance-sheet.

MFs have had troubles over their debt investments in recent months due to exposures to companies like Dewan Housing, Essel group firms, Anil Ambani group firms and IL&FS entities.