Vodafone Idea: The junk bond solution

Dear Ms Nirmala Sitharaman,

The solution to any problem is in defining the problem well. At the core of the Vodafone Idea quagmire is the cash-flow mismatch. If we can wrinkle out excess payables in the near future over the cash--plus expected receivables--we can ensure Vodafone Idea remains a surviving concern.

That can be done by first converting loans extended by banks and unpaid AGR (adjusted gross revenues) dues into zero coupon bonds of at least 10-year duration.

Zero coupon would ensure Vodafone Idea has surplus cash to re-invest by servicing its vast customer base, provide healthy competition in the telecom services market, prevent the banking system from being saddled with further NPAs and provide a tangible tradeable financial asset to the Department of Telecommunications (DoT).

The zero-coupon bonds could be issued at appropriate discounting and yield to maturities to reflect absence of suitable collateral. Once issued, the regular hair-cut for risk capital computations would apply to them.

Banks that can trade in or out of them would create liquidity behind India's first ever junk bond issue that Vodafone Idea could make. DoT can choose any bank it likes to manage its portfolio of junk bonds and over time trade out of these bonds to receive real cash.

With teething pains of a re-birth of the new Vodafone Idea being taken care of with this cash flow mismatch re-alignment, new investors as well as promoters can find it attractive, promising and viable to shore up equity with fresh investments too.

This is a win-win solution. A problem is solved by addressing the root. A solution should not create new problems or ignore related problems. It gives strong signals of honourable governance, evoking greater trust and therefore greater valuation of the economic bet that India is.

It is also possible to consider encouraging Vodafone Idea to form a totally new company and do a 1:1 share swap to retain identical shareholding to ensure the wider shareholder base does not lose out and the new company can attract provisions of lower income tax for newly registered corporations. Even if some dues go sour and difficult to recoup, creditors and their debtors are in a difficult relationship of until death does them apart. A good creditor ensures death is postponed so that nothing can then do the debtors apart from creditors.

Yours sincerely,

Sushil Kedia

The writer is Founder and CEO at market research firm KEDIANOMICS