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

STFC debt papers held by Franklin are graded by domestic rating agency Crisil, which is yet to revise its ratings on these papers.
The six wound-up debt schemes of Franklin Templeton Mutual Fund (MF) have concentrated exposure to certain companies in the non-banking financial, asset reconstruction, and renewable energy sectors. This closely ties up fortunes of investors with how these companies weather challenges presented by the Covid-19 pandemic and the lockdown.

At the 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. The commercial vehicle portfolio is more exposed to business activity, which will be hampered by the lockdown measures.

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.

Disclosures from the March 31 factsheet showed 9.8 per cent assets of Short Term Income Fund had exposure to STFC; Dynamic Accrual Fund had 8.57 per cent exposure and Credit Risk Fund had 10 per cent exposure. Overall, the wound-up schemes had Rs 2020 crore exposure to STFC, according to a note by B&K Securities.

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

In 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 a stable outlook, it pointed out the rating remained constrained by the high-risk profile of the company's asset class, and its complex resolution process and the associated uncertainty.

ARCs invest in debt-troubled firms at stress valuations and make upside on their recovery.

 

 
Experts say credit exposure is fine in credit-risk funds, but a large chunk of such exposure in duration schemes is 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 

Franklin's Low Duration Fund 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. Besides debt-related issues, the firm is facing potential risks from the pending off-take agreement and the pending outcome of price re-negotiations with Andhra Pradesh power distribution companies.

Another NBFC, which accounts for a large exposure, is Piramal Enterprises, along with its subsidiary Piramal Capital & Housing Finance. According to disclosures by rating agencies, both entities have sought moratorium from banks on their loan payments.

As much as 7.6 per cent assets of Ultra Short Bond Fund have exposure to Piramal Enterprises; 9.47 per cent of India Income Opportunities Fund is exposed to Piramal Capital & Housing Finance. Overall, these wound-fund funds have Rs 2302 crore exposure to these two Piramal companies, noted B&K Securities. 

In April, CARE Ratings assigned ‘AA’ rating to Piramal Enterprises, with a stable outlook, citing the strength of established track record of the promoter group in building and scaling up businesses. However, it pointed out rating constraints on account of the 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,” it stated.

What is the maturity profile?

According to a note put out by B&K Securities, about 26.21 per cent of the exposure (Rs 8,084 crore) of the six wound-up schemes is set to mature in 12 months.

While 9.19 per cent is maturing between 12 and 18 months, 13.39 per cent is maturing between 18 and 24 months. As much as 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.

Experts say maturities won't be 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 markets start to stabilise,” said a fund manager. 



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