Franklin Templeton receives prepayments from bond issuers
On April 23, Franklin Templeton India’s 6 debt funds, which closed due to illiquidity and redemption pressure amid the COVID-19 turmoil, have received around ₹2,000 crore in repayments/prepayments from underlying bonds. Investors who have contributed are Xander Financial and Hero Solar Energy. Some energy sector and renewable sector organizations have also contributed in the same.
The recent scenario:
Franklin Templeton has borrowed capital from banks to manage the remittance pressure for these 6 schemes that we are talking about. Hence, the total amount received has been directed towards settling these bank liabilities. Recovery can be seen in the dynamic accrual fund and the amount of ₹100 crore received from Hero Solar Energy has been received under this fund only. Soon the ultrashort term fund will also become cash positive.
According to Franklin Templeton, they will be receiving such continuous inflow regularly and all maturities and other commitments will be met by their portfolio securities, as per predefined timeline. Adding, they are optimistic with respect to further decrease in borrowing levels throughout these funds. They will be receiving funds through coupons, scheduled maturities and prepayments.
The funds that wound up had total assets under management (AUM) amounting ₹25,856 crore. While few investors have made payments and/or advances with Franklin, the matter of concern is that many of the debt funds are still lacking enormous liquidity. Around 88-100 percent of the portfolio ranks below “AA-” along with no or low trading. As per the guidelines laid by Securities and Exchange Board of India (SEBI), before any repayment to unit holders, every scheme must clear its total liabilities. Once the liabilities are cleared, Franklin plans to reach out to investors for their approval via electronic mode.
Clearing the misconception:
There is a misguided judgment that the borrowing decreases the AUM of the respective scheme and that on repayment of the same it takes away value from the investors. Whereas, in the beginning only the borrowing is regarded as a liability and its adjustments are taken care of while computing AUM. Viably, the portfolio value is kept much higher than the AUM that is revealed. Therefore, repayment of borrowing keeps the AUM intact.
The second reason for shutdown of Franklin’s 6 debt funds:
Another cause for closing down these schemes is the recent SEBI guideline, which forbids funds from investing more than 10% of their assets in unlisted bonds. In India, anything rated below AAA- is considered non-venture grade since high return market is extremely immature in these categories. Franklin’s six funds had a lot of similar kind of private debt. In October 2019, when SEBI announced the new rule saying that any investments in unlisted instruments should be less than 10%, this gave a double blow to these 6 schemes of Franklin. As a result, it could not hold more than 10% nor it could be traded as there were not many buyers and the guideline was not allowing exchanging. This stranded around 33% of its assets.