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Fixed Income

Vodafone Pays Franklin and We Record a Good Trade


We get a low-risk 5% return from a strategy that bought and held the Franklin UST Bond Fund for a week. Read on for the details.

A sequence of events played out a few months back, and involved Vodafone-Idea and Franklin Templeton Mutual Fund. It started off with a court ruling (around October 2019) saying that Vodafone Idea (and other telcos) had to pay a truckload of fees as a percentage of their Annual Gross Revenue (AGR) to the government. This hit Vodafone Idea the hardest, and that created a problem for a number of mutual funds that held Vodafone-Idea debt. (Read our post)

Of them, one was Franklin Ultra Short Bond Fund. This fund had about a 4% exposure to Vodafone-Idea, and in January 2020, the Supreme Court reaffirmed the fee and said Vodafone had to pay by January 23. (Read our post)

This was now January 21. We then knew that two things were happening:

  • Franklin immediately marked the Vodafone-Idea bond in the Ultra Short Fund to Zero.
  • They intended to segregate/side-pocket the bond into a separate fund (Read this to understand segregation)
  • They couldn’t segregate until the actual downgrade by rating agencies, which took two more days to come. (See Crisil downgrade)

So at Capitalmind Premium, we thought of an opportunity. Our post, an “Actionable”, details it out. We would buy the Ultra Short Bond fund, sell it after the segregation, and the idea was to make the 4% or so for the few days that the money was in the fund.

The bet was that Vodafone would pay. The bet was also that if Vodafone didn’t pay, you didn’t lose anything. There was a small risk that the world would come crashing down in the 6 days we ended up holding the fund, but that did not happen (luckily).

We chose the Franklin Ultra Short Bond (we call it UST) fund for this operation because the UST fund had Vodafone-Idea bonds maturing in July 2020, just six months later.

And Vodafone Did Pay.

On July 10, Vodafone paid the entire amount due. Including interest.

Earlier, on June 12, it had made an interest payment too.

Both times, Franklin has paid out all the money it received, to all unit holders. (Including us)

The Outcome: 5% returns for the 6 days

Vodafone-Idea has now fully paid the bond.

Timeline of our proposed actionable went like this:

Vodafone Franklin Trade

While the return was just 5% in those four days, it was a healthy number for a relatively low risk. Remember, your money was stuck for just 6 days, and you would eventually end up making 5%.

Note that the original UST fund is now shuttered. So it was indeed good we took that exit in January itself.

This note just saves yet another one of our short-term opportunity trades, where we find something interesting as an arbitrage and note it to members on Slack.

Read about other short-term Actionables:

Trading the Reliance Rights Issue like an Option [link]

Results from the Reliance Rights and POWERINDIA opportunity [link]

Premium members get access to actionables (by email and slack) in addition to our research on macros, sectors, stocks, model equity & fixed income portfolios, and the member forum. Sign up for Capitalmind Premium today. Talk to us @capitalmind_in (on twitter) or email premium [at] capitalmind [dot] in for any questions.


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