Vodafone Idea Rating Downgrade: Exit Funds With This Exposure?

On 22nd November 2019, Crisil Ratings, as well as CARE Ratings, downgraded Vodafone Idea Limited’s NCD Ratings to BBB- with a Negative outlook.

In Crisil’s Rating Rationale, it states that “The downgrade factors in the substantial impact on the financial risk profile of the potential payout against the adjusted gross revenue (AGR)-related disputed liability, and continued weak operating performance.”

While CARE Rating says that “The ratings also factor in the weakening of financial support to VIL from its promoters (both Vodafone Plc. and Aditya
Birla Group) in the near term owing to significant competitive pressure in the telecom industry.”

Mutual Fund Exposure in Vodafone Idea :

Indian Mutual Fund Industry has exposure of 3,375 Crores across different Debt and hybrid funds. And this exposure is divided into 4 AMCs:

Top 10 open-ended funds with Vodafone Idea Limited NCD exposure are:

What does this exposure Indicate?

It is clear that Vodafone Idea is under pressure in terms of its liquidity. Add to it the competition in the telecom industry, there may be further stress coming its way.  The rating downgrade has also included the ruling of Hon. Supreme Court needs Vodafone Idea Limited to pay an estimated amount of 44,200 Crores as AGR (Adjusted Gross Revenue) Liability.

In light of this, What action should Mutual Fund investors take? Does it make sense to redeem the funds with this holding? Or we can wait and give the company time to bounce back?

First, let’s understand that a rating downgrade doesn’t mean that the company will default.

There may still be scope for Vodafone Idea to recover from this stress which may lead to upgrading the credit rating. However, that’s something no one can be sure of.  Just as we have said before, Investment is about reducing the probability of loss.

In current circumstances, it seems that the probability of loss is higher than that of gain. See below how the gradual decrease in credit rating has happened in case of Vodafone Idea Limited:

Looking at this pattern, in our view, investors are better off to be safe than sorry. Hence, if an investor has holdings in the funds with exposure to securities issued by Vodafone Idea Limited, now may be the time to exit and invest in safer funds.

We will reiterate on the point that, the company has not yet defaulted. But if we have learned anything from the past, It’s this; better to have one bird in hand rather than two in the bushes. You may want to read the blog we wrote on DHFL Default which shows exactly what to avoid while investing in debt funds.

This is a precautionary action which we are recommending. It is important to understand any cost impact like exit load and tax implication involved in taking this action.