BT Insight: Where 6 Franklin Templeton funds got stuck; recovery tougher

The fate of investors of the six closed debt funds and other fund of funds (FoF) investors will depend upon how quickly the Franklin Templeton fund house is able to sell all its securities. Though RBI’s liquidity push of Rs 50,000 crore may prevent the spread of liquidity crunch to other funds in the near future, the FT investors’ road to recovery looks distant. What are the challenges the fund house will face in selling off its assets and paying back the investors?

Higher the proportion of sovereign and cash investments of a debt fund, easier it is to wind up the exposure. However, the fund house has already sold most of its sovereign debt securities to handle the redemption pressure since August 2018. As per the report from B&K Securities, these six schemes faced a total redemption of Rs 20,879 crore till 23 March, 2020. Now, it is left with mostly corporate debts which will be very difficult to sell in current market conditions. As per a report from Transfin, out of total gross assets of Rs 29,171 crore on 23 April, 2020 the corporate debt asset is Rs 26,240 crore, which is almost 90% of the total assets.

These six funds have the biggest exposure in top 10 holdings, which entail 45% of the fund’s gross assets. If the fund house manages to sell these top 10 debt securities quickly, it will boost ability to liquidate the remaining assets.

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The fate of investors of the six closed debt funds and other fund of funds (FoF) investors will depend upon how quickly the Franklin Templeton fund house is able to sell all its securities. Though RBI’s liquidity push of Rs 50,000 crore may prevent the spread of liquidity crunch to other funds in the near future, the FT investors’ road to recovery looks distant. What are the challenges the fund house will face in selling off its assets and paying back the investors?

Higher the proportion of sovereign and cash investments of a debt fund, easier it is to wind up the exposure. However, the fund house has already sold most of its sovereign debt securities to handle the redemption pressure since August 2018. As per the report from B&K Securities, these six schemes faced a total redemption of Rs 20,879 crore till 23 March, 2020. Now, it is left with mostly corporate debts which will be very difficult to sell in current market conditions. As per a report from Transfin, out of total gross assets of Rs 29,171 crore on 23 April, 2020 the corporate debt asset is Rs 26,240 crore, which is almost 90% of the total assets.

Top 10 holdings key to liquidation

These six funds have the biggest exposure in top 10 holdings, which entail 45% of the fund’s gross assets. If the fund house manages to sell these top 10 debt securities quickly, it will boost ability to liquidate the remaining assets.

It is easier said than done because none of these top holdings are sovereign or AAA rate debt. The greatest indicator of the scale of the problem is that the funds are left with no AAA rated securities in their top 20 holding. All securities are either AA rated or below. This curtails the funds’ ability to find enough buyers.

Quickest recovery to come from AA rated securities

The only glimmer of hope is the next highest rate holding, which are AA rated securities. The funds have Rs 11,178 crore exposure in AA rate debt securities, which makes for almost 38% of the remaining assets. This is a big chunk and comparatively low hanging fruit which the FT schemes can sell at earliest.