News Analysis

What has changed in the wound-up Franklin funds over the past month?

Radhika Merwin BL Research Bureau | Updated on May 21, 2020 Published on May 21, 2020

There have been some inflows and repayment of borrowings. But a few funds still have sizeable liabilities

After nearly a month of winding up six of its debt funds, Franklin Templeton recently came out with updates, assuring investors of regular flows and notable reduction in the borrowings of these schemes. While there have been inflows in some funds and repayment of liabilities, there has also been an increase in borrowings in most funds (from April 23 levels, when the winding up was announced), to honour redemption requests made on April 23 before the cut-off time.

Hence, in some funds such as Franklin India Short Term Income Plan and Franklin India Income Opportunities Fund, borrowings are still high at 33-39 per cent of assets (as of May 15). Of the six funds, Franklin India Ultra Short Bond Fund has seen notable inflows and marked reduction in borrowings.

Here are four things that you as an investor need to know about the wound-up debt funds.

 

Inflows yes, but not in all

The fund house has received cash flows in some of the funds through coupons, maturities and prepayments. For instance, in the case of Franklin Ultra Short Bond, ₹158 crore has been received between April 24 and April 30, while about ₹272 crore has been received between May 1 and May 15. Similarly, for Franklin Credit Risk and Franklin Dynamic Accrual Fund, ₹230 crore and around ₹107 crore of inflows, respectively, have come in between May 1 and May 15. These have mostly been in the nature of prepayments by bond issuers (in advance of the maturity).

But not all funds have seen such inflows. For instance, Franklin Low Duration and Franklin Income Opportunities have seen negligible cash flows since April 24 (less than 0.5 per cent).

Even in funds that have seen inflows, how much coupon has been received on time etc, is unclear. Hence while it is good news that some inflows are coming in, it is difficult to ascertain how much of this will be paid to investors and when. As such, the inflows are being used to first repay borrowings before paying money to the investors.

Repayment, but sizeable borrowings still

According to regulations, the schemes must discharge their liabilities — payoff borrowings — before returning money to investors. Remember, most of the six funds borrowed significant amounts to meet large redemptions over the past two months. Hence the inflows into some of the funds since April 24 have been used to repay borrowings, interest and expenses (if any).

For instance, with Franklin Ultra Bond Fund, borrowings have reduced to ₹371 crore as of May 15, from ₹802 crore on April 23. But for some of the other funds, borrowings are higher, because of the additional borrowings on April 24 taken to pay redemption requests that came on April 23 (before cut-off time). Hence, for funds such as Franklin Short Term Income and Franklin Income Opportunities, while repayments have happened, borrowings are still a sizeable 33-39 per cent of assets (as of May 15).

In Franklin Dynamic Accrual Fund, there are no borrowings as of May 15.

Moratoriums can delay payouts

Aside from the delay on account of repayment of borrowings, payouts to investors could also get delayed on account of moratorium extended to some bond issuers with respect to maturities.

In the case of Franklin Short Term Income Plan, Franklin Income Opportunities, Franklin Credit Risk Fund and Franklin Dynamic Accrual Fund, moratorium has been extended on the request of the Future group, with respect to NCDs issued by them. Hence the maturity dates have been revised upward (by mostly three months) for bonds with maturities falling in 2020-2023.

The updated maturities have been factored in the maturity profile/cash-flow projections of the funds. While there has been no drastic change in the cash-flow projections (some notable change in Franklin Income Opportunities though) from that disclosed as on April 23, more such moratoriums can impact the maturity profile or cash flow projections of the funds in future. This could imply a longer wait for investors to get their entire money back in some funds.

A long wait, unless market improves

Ideally, a debt fund’s Macaulay duration (time taken for the money invested in the bond to be repaid by the cash flows) or average maturity (which is typically longer) gives an indication of the maturity period of the underlying bonds in the portfolio. Schemes with shorter portfolio maturity should be able to return money sooner than those with a longer maturity (based on the level of borrowings).

Franklin has worked out cash-flow projections of each of the six funds based on the maturities of the bonds in the funds’ portfolio. Franklin India Ultra Short Bond Fund and Franklin India Low Duration Fund are expected to return notable portion — 53 per cent and 48 per cent respectively — of money back to investors within one year. In case of Franklin India Dynamic Accrual Fund, 26 per cent of the money is expected to be returned within a year; while in the case of Franklin India Credit Risk Fund it is 15 per cent; and for Franklin India Short Term Income, it is just 4 per cent. In the case of Franklin India Income Opportunities Fund, projections show that investors may get 18 per cent within three years.

However, these projections do not take into account sale of securities (in the secondary market), payments of coupons, prepayment etc., which can increase the payout to investors. But given that the market (particularly for low-rated bonds, which the funds hold) is unlikely to return to normalcy anytime soon, the sale of securities in the secondary market may not happen in the next one year. The measures announced so far by the RBI or the Centre do not appear to address the illiquidity issue with low-rated bonds.

A default by corporates issuing these bonds can also lower the payout to investors.

Published on May 21, 2020

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