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The Franklin crisis: What's up?

Here is an overview of how the six shuttered funds of Franklin Templeton stand in terms of recoveries and credit quality

The Franklin crisis: What's up?

Franklin Templeton Mutual Fund announced the voluntary wind-up of six of its schemes on 23rd April. The AMC cited the significant fall in liquidity across the debt market owing to COVID-19 and the subsequent lockdown as the reasons for the decision. These six schemes included Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund and Income Opportunities Fund. A lot has happened since then. We have been updating all the events in this saga here.

Amid all the noise, litigations, allegations and clarifications, we have tried to draw a broad picture and derive answers to two main questions that every Franklin investor has:

What has been the repayment scenario in the various affected schemes so far?
Overall, the suite of six yield-oriented funds has been able to make recoveries at a decent pace. Perhaps, there are some concerns in the scheduled repayments of Franklin India Short Term Income Plan. However, there have been prepayments across the board. Our repayments analysis is inclusive of the interest rate reset and put option dates as and where specified in the fund house's disclosures. This analysis is based on the portfolio disclosures as on 23rd April and 13th November.

Across all the funds, some group issuers, including Future Group, Reliance-ADAG and Edelweiss Capital, have caused some pain. While Future Group and Reliance-ADAG defaulted on their obligations, the payment from the Edelweiss group securities was delayed on account of a maturity date reset from June 2020 to June 2022. Different funds had different exposure to these securities. So, the repayments were impacted differently. Essel Group also defaulted on its payments in May. However, the fund house managed a partial recovery.

How has credit quality of the holdings of the affected schemes progressed?
When it comes to the credit quality of outstanding bonds, most funds have witnessed more downgrades than upgrades. Rating downgrades have been across groups like Edelweiss Capital, Shapoorji Pallonji, Vedanta, Sadbhav and Future Group. Noteworthy is the fact that the bonds of Future Group stand completely marked down to zero in the current portfolio. This affected different funds differently. Currently downgraded below the investment grade, most of these securities were downgraded on more than two counts in the last few months.

Securities of Reliance-ADAG (rated default grade before winding-up) are also currently marked to zero. However, these securities had already seen significant haircuts before winding up.

Overall, the good thing is that no other outstanding bond slipped below the investment grade in these last few months. Vodafone Idea (security held in the segregated portfolios of five of six funds), which was already below the investment grade, was downgraded a notch lower. As for the upgrades, they were largely across securities of three group issuers - A V Birla, Kedara Capital and Multiples PE.

Let's understand how each of the funds stands now with respect to recoveries, upgrades/downgrades and their latest credit profiles.

Franklin India Ultra Short Bond Fund
With an AUM of Rs 10,100 crore, this fund is the biggest among the six shuttered funds. It has had smooth progress on repayment as it has by and large received payments on time. Of the 31 securities scheduled (as per the portfolio disclosures) for repayment in the last few months, the fund has already received payments from about 29. This helped the fund collect Rs 4,400 crore. While most issuers made full payments, few made part payments. Moreover, the fund received part payments (as per issuance terms) of Rs 182 crore from a few securities across groups like India Shelter, UP Power Corporation and Xander. Further, the fund received Rs 112 crore as buy back proceeds from two securities of groups like Northern Arc and Indostar. The fund also sold securities of ICICI Bank on 28th April, which were originally scheduled for maturity in March 2022.

This was the first fund to achieve the cash-positive status. Its outstanding portfolio is currently about 22 per cent in A+ and below-rated bonds, 34 per cent in AA rated and with only negligible in AAA rated. Bonds downgraded in the last few months accounted for about 18 per cent of the portfolio as on 23rd April. These bonds are mainly spread across four group issuers: Edelweiss Capital, Vedanta, Clix and Punjab National Bank.

Franklin India Low Duration Fund
This fund has seen on-time action in almost all the securities due for maturity in the last few months. Additionally, part payments as per issuance terms, buyback proceeds and prepayments were also received across securities from groups like Esskay, Nirma, UP Power Corporation, Renew, Indostar, Five Star Business Finance, Sterlite Power Grid Ventures of the Vedanta group and Xander. This enabled the fund to collect Rs 257 crore. In this cash-positive fund, Renew, JM Financial and Vedanta account for the major groupwise holdings of 16,14 and 9 per cent, respectively.

The fund is about 43 per cent invested in A+ and below-rated bonds, with 28 per cent in AA rated ones. This is only for the bonds that are still outstanding. The securities that have been downgraded accounted for about 15 per cent of the April portfolio. None of the outstanding bonds in the portfolio have witnessed rating upgrades in these last months. Securities of Reliance-ADAG which were already under default grade, are currently marked to zero. However, the same was valued at Rs 7 crore in the April portfolio.

Franklin India Credit Risk Fund
Following the repayment of the borrowings, this fund turned cash positive in August. The repayments for this fund have largely been as per schedule. Of the 16 securities that were due, 10 were able to repay a total of Rs 683 crore. The remaining six securities that have not repaid accounted for about 3.7 per cent of the portfolio at the time of winding up. Since these six securities were relatively small holdings, repayments were not hugely dented. As a result, it appears that a bulk of the money has already been received. The fund also received part payments of about Rs 18 crore (as per issuance terms) from groups like Renew and Vedanta. Further, the fund also received buyback proceeds worth Rs 90 crore from Five Star Business Finance.

The outstanding portfolio (as on November 13) has about 0.3 per cent in AAA rated bonds, 56 per cent of the portfolio in A+ and below-rated bonds and 35 per cent in AA rated ones. Going by the exposure as of April 2020, about 13 per cent of the portfolio has been downgraded, while 6 per cent has been upgraded. Outstanding securities of Future Group that accounted for about Rs 117 crore, i.e., 3 per cent of the April portfolio, stand completely marked down. Outstanding securities of Reliance-ADAG that accounted for about 0.3 per cent of the April portfolio, have also been marked to zero.

Franklin India Dynamic Accrual Fund
Franklin India Dynamic Accrual Fund is the fourth among the cash-positive schemes. In the last few months, 20 securities were due for maturity. Of these, the fund received full or part payments worth about 332 crore from 14 securities.
But the silver lining is that the fund also received prepayments worth Rs 105 crore from Hero and Jindal group. Additionally, it received part payments of about Rs 34 crore from as many as seven securities. The AMC stated that these payments had been as per issuance terms. Further, the fund received buy back proceeds of Rs 168 crore spread across two issuers namely, Five Star Business Finance and Indian Shelter. Securities that were behind schedule and also didn't make any part payments held about Rs 190 crore as per valuations on April 23.

The credit quality of the outstanding portfolio is roughly 38 per cent in AA and 33 per cent in A+ and below rated securities. Bonds of Future Group are currently marked down to zero but accounted for about 5 per cent in the April portfolio. Reliance-ADAG securities worth over Rs 1 crore in April portfolio, are also currently marked down to zero.

This Rs 2500-crore fund witnessed downgrades across 18 per cent (going by valuations on April 23) of the outstanding portfolio. About 2.5 per cent of the portfolio saw rating upgrades.

Franklin India Short Term Income Plan
With an AUM of Rs 5,368 crore, this is the second biggest fund among the six shuttered funds. Prima facie, it looks like this fund is struggling quite a bit in terms of scheduled repayments. However, the fund received part payments and buy back proceeds.

Of about 26 securities due for maturity till mid-November, only 16 were able to pay back either in full or partly. The remaining, which did not turn up, included Reliance-ADAG (currently marked zero), Edelweiss Capital securities valued at Rs 345 crore currently and Piramal securities valued at Rs 45 crore. The latter two, together account for about 7 per cent of the current portfolio.

Further, the fund collected about Rs 529 crore from part payments and buy back proceeds. This fund currently has about 18 per cent of borrowings. As for the credit quality break-up, this fund has majority exposure, i.e. 62 per cent to securities rated A+ and below and about 38 per cent in those rated AA. The securities of Future Group are currently marked down to zero but accounted for around 8 per cent at the time of winding up. The marked down securities of Reliance-ADAG, was valued at about Rs 12 crore in April.

This fund observed rating downgrades across several of its holdings spread across seven groups. All of this together made up for over 25 per cent of the April portfolio. However, 9 per cent has already seen rating upgrades.

Franklin India Income Opportunities Fund
The smallest of the six funds, this fund is still paring down its borrowings, which currently account for about 30 per cent of the AUM.

It has seen the least activity as only three securities were due for maturity till November. Of the three securities, one was of Reliance-ADAG and two of Tata group. The fund received payments of about Rs 68 crore from Tata group. Further, the securities of Renew and Vedanta group made part payments (as per issuance terms) worth Rs 12 crore and buyback proceeds of Rs 51 crore from Five Star Business Finance.

The currently outstanding bonds have 58 per cent exposure to AA rated bonds and 42 per cent to those rated A+ and below. Securities of Future Group that are currently downgraded to the below investment grade are marked down to zero but had around Rs 240 crore exposure, making up for about 13 per cent of the April portfolio. Securities of Reliance-ADAG, that are currently marked to zero, accounted for 0.2 per cent in the April portfolio.

As per April valuations, about 26 per cent of the overall portfolio, accounting for Rs 490 crore, has been downgraded as against 5 per cent, i.e., Rs 97 crore that has been upgraded.