Franklin Templeton’s six wound-up schemes face concentration risks

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The six wound-up debt schemes of Mutual Fund (MF) have concentrated exposures to certain companies belonging to sectors such as non-bank financial companies (NBFCs), asset reconstruction companies (ARC) and renewables, closely tying up fortunes of investors with how these companies are able to weather challenges thrown by lockdown and coronavirus (Covid-19) pandemic.


At an individual scheme-level, three of the wound-up schemes — have 9-10 per cent exposure to Shriram Transport Finance (STFC) — which saw its long-term issuer rating downgraded by Fitch Ratings recently, to factor in the asset-quality risks the company faces as the commercial vehicle portfolio is more exposed to business activity, that will be hampered by lockdown measures taken to contain spread of Covid-19.



To be sure, STFC debt papers held by Franklin are graded by domestic rating agency Crisil, which is yet to revise its ratings on these papers. These continue to be graded at AA-plus, re-affirmed by the agency in early March.


Disclosures from March 31 factsheet show 9.8 per cent of assets exposed in Short Term Income Fund to STFC, 8.57 per cent exposure in Dynamic Accrual Fund and 10 per cent in Credit Risk Fund. Overall, the wound-up schemes of FT MF had Rs 5,786 crore, showed a note by B&K Securities.


However, advisors say that it is expected of the fund to have done deeper due-diligence for larger exposures. “We will have to wait and watch how the impact of the larger exposures play out in wound-up schemes, but one can presume that fund manager would have been more cautious when deploying larger share of funds to a single entity,” said Amol Joshi, founder of Plan Rupee Investment Services.


On the asset reconstruction space, Franklin Low Duration Fund had 10.79 per cent of its assets exposed to JM Financial ARC. While ICRA in January re-affirmed its AA-minus ratings on the company, with stable outlook, it pointed out that the rating remains constrained by high-risk profile of company’s asset class, complex resolution process and associated uncertainty with it, which results in lumpy cash flows.


ARCs or asset reconstruction companies invest in debt-troubled companies at stress valuations, and make upside on the company’s recovery.


Experts say, credit exposures are fine in credit risk funds, but a large chunk of such exposures in duration schemes are avoidable. “The entire MF industry needs to re-look at taking such risks at a larger scale in duration schemes, especially those with under two-year categories, as investors in such categories seek near-term liquidity,” said Vidya Bala, co-founder of primeinvestor.in


The Low Duration Fund of Franklin also had 11.01 per cent exposure to renewal power sector player Greenko Clean Energy Projects. Recently, CARE Ratings put the company under credit watch with negative implications. After credit enhancement (CE), the company is rated single A-plus and without the CE, its rating is just about investment grade at BBB-minus. Apart from debt-related issues, the company is facing potential risks from pending off-take agreement and pending outcome of price re-negotiating with Andhra Pradesh power distribution companies.


Another NBFC, which accounts for a larger share of Franklin’s wound-up schemes is Piramal Enterprises, along with its subsidiary Piramal Capital & Housing Finance. According to disclosures by rating agencies, both the entities have sought moratorium from the banks on their loan payments.


Piramal Enterprises has 7.6 per cent of scheme assets exposed in Ultra-Short Bond Fund, while Piramal Capital & Housing Finance has 9.47 per cent exposure in India Income Opportunities Fund. Overall, the wound-up schemes of FT MF had Rs 5,786 crore, the B&K Securities note showed.


In April, CARE assigned AA rating to Piramal Enterprises, with stable outlook, citing strength of established track record of promoter group in building and scaling up businesses. However, pointed out rating constraints on account of moderately seasoned loan book, as well as significant sectoral exposure to the real estate sector. “Client concentration in the loan portfolio, given large ticket size of loans to developers continues to, pose risk,” Care said in its note.


What is the maturity profile?


According to a note put out by B&K Securities, about 26.21 per cent of the exposures of the six wound-up schemes are set to mature within the next 12 months, i.e. Rs 8,084 crore.


While 9.19 per cent is maturing between 12 to 18 months and 13.39 per cent between 18 to 24 months, 19.26 per cent is maturing in two-three years. The remaining maturities are set beyond four years, according to the report put out by the brokerage.


However, experts say maturities themselves are not enough to gauge the timeline of payments for investors. “The funds might also be having put options on certain securities, which they can exercise to sell the bonds back to the company at a pre-agreed price. Also, the fund can start to liquidate the holdings once the start to stabilise,” said a fund manager.

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