Franklin Templeton Recovers Rs 2,666 Crore In Six Wound-Up Mutual Fund Schemes

Franklin Templeton Mutual Fund has so far recovered Rs 2,666.12 crore of the amount due to investors of the six debt schemes it shuttered in April citing redemption pressure.

The asset manager owed investors more than Rs 28,000 crore when it wound up the schemes. But net assets have since fallen to Rs 25,000 crore after paying lenders and also because the value of some of the debt securities held declined.

The proceeds, however, can't be distributed to unitholders because of a stay by the Gujarat High Court on the e-voting process required to wind up the schemes. On June 19, the Supreme Court transferred all pleas filed in high courts across the country relating to the shuttering of the six schemes to the Karnataka High Court. But it didn't lift stay on the e-voting process. The legal challenge came after Franklin Temple wound up the debt schemes citing redemption pressure and liquidity issues.

Most of the money recovered came from investments made in the Franklin India Ultra Short Bond Fund, according to its disclosures. As much as Rs 869.7 crore was recovered between June 16 and June 30, taking the total amount recouped since the scheme was wound up to Rs 1,930 crore.

Of the six schemes, only two were cash positive at the end of June. The Ultra Short Bond Fund had cash of Rs 1,393 crore, about 13% of its assets under management. Franklin India Dynamic Accrual Fund had cash of Rs 140.31 crore at the end of last month.

In the other four, the asset manager will first have to repay lenders before it can start generating funds to repay ts unitholders.

Still, the net cash position of the four schemes with outstanding debt improved in June.

In June, Franklin Templeton several times exercised a put option on the bonds it held, allowing it to recover funds earlier than maturity. Yet, a substantial portion of the outstanding can only be recovered between 2021 and 2025. Unless it manages to sell bonds in the secondary market.

According to the maturity profile of the bonds held in the six schemes, the fund house expects to receive 28% of the outstanding in its Ultra Short Bond Fund, 15% in its Low Duration Fund, 1% in its Credit Risk Fund and 13% in its Dynamic Accrual Fund by the end of 2020.

Worsening Credit Quality

A factor that can impact the value of assets under management is the credit quality of the bonds held by the six schemes, according to Kirtan Shah, chief financial planner at Sykes & Ray Equities.

After the six schemes were wound up, the ratings of as many as 39 securities were downgraded, according to disclosures made by Franklin Templeton. Sixteen of these downgrades were on bonds held in the Franklin India Short Term Income Plan.

Most of the downgrades came on debt issued by the Future Group and Edelweiss Rural & Corporate Services. None resulted in a security getting a junk rating.

In the event of a downgrade, fund houses have to mark down the value of the security to reflect the higher credit risk based on inputs provided by Crisil and ICRA, said Shah.