A nightmare has come true for Franklin Templeton debt funds investors after the fund manager wound up six debt schemes on April 23. Investors who put their hard-earned money in supposedly safe debt funds do not know what'll happen to their investments. When can they expect their money back?
We approached the fund house but failed to get any response. The company asked us to refer to its recent press release issued on the matter. Based on publicly available information, analysts' reports and experts' opinion, here's a possible timeline by when the investors can expect their money.
The crisis was long building up
But before embarking on a possible timeline, we need to understand the situation under which the fund house was operating. As per a report from B&K Securities, the corpus of the six exposed FT funds stood at Rs 47,658 crore at the end of August 2018. It was also the time when liquidity crisis in the shadow banking space began to surface after the first default by IL&FS. Since then, these six closed funds from Franklin Templeton lost a total corpus of Rs 16,804 crore till March 2020. As a result, in a span of 19 months, the reduced corpus stood at Rs 30,854, including Rs 2,753 of borrowing to manage redemption pressure. Worst was yet to come as in April, these funds lost a corpus of Rs 4,075 crore in first 20 days of the month and reduced corpus stood at Rs 26,779 crore on April 20, 2020. This means these debt funds were yet to come out of liquidity drought started in the wake of the shadow banking crisis when COVID-19 blew the knockout punch.
Explaining the rationale behind the drastic measure, Franklin Templeton in its press release said: "While for many years, these managed credit funds have carefully invested in and supported growing businesses in India, unfortunately, the extreme drop in liquidity in the bond markets, coinciding with very large redemptions following the COVID-19 outbreak has compelled us to make difficult decisions in order to protect the interests of the funds' unit-holders".
However, market experts believe the problem was not simple and many fund houses were going beyond their mandate in terms of risk exposures to generate a higher return. "Despite the categorisation by SEBI, a lot of debt schemes take on risks that are not reflected in their scheme riskometer or their category names. Fund managers with a view to generating higher return tend to take higher risks in the portion of other investments permitted in even safe low-risk categories," said Deepak Jasani, Head of Research, HDFC Securities.
In the current scenario, the RBI has been making sure there is no big liquidity issue in the financial system. So, it was not entirely the liquidity issue but more of an overall redemption pressure in the financial system due to coronavirus and apprehension over its economic fallout. For Franklin Templeton, the issue appears peculiar, which has more to do with illiquid exposure the fund house took to generate higher returns.
No timeline promised to investors
The fund house has not given any clear indication about the possible timeline within which it will liquidate all its investments and return investors' money. "Details of the winding-up process will be communicated to existing unitholders of the funds impacted by this decision at the earliest. The funds will continue to publish their net asset values daily, and investors will not be charged any investment management fee on these funds, going forward," the Franklin Templeton release said. In the given scenario, waiting till maturity of underlying debt securities appears unviable so the fund house will need to come out with a clear roadmap soon.
It will be a long wait for impacted investors
The maturity timeline of the debt securities held by these six funds spans above 5 years. So it looks impractical that the fund house will wait for these securities to mature. "As per the communication, the intent is to wind up in less than a year but only 26% of the portfolio will mature in the next year. If the market does not resume normalcy, it will be difficult to sell illiquid papers," suggests the B&K Securities report.
While the fund house is expected to sell the good credit quality papers with the first sign of liquidity improvement in the market, it will face a daunting challenge in selling its illiquid exposure.
The timeline of the full-fledged opening of the economy is still unclear so an educated guess may not suggest any normalcy in day-to-day life before 6 months. Therefore, any expectation for capital markets to return to normalcy before that could be highly optimistic. The FT investors will be quite lucky if they can get their invested money back without any loss in the next six months.
Will investors lose their money
The other biggest worry is whether there will be any loss to the invested money. The fund house has made an attempt to assure investors that it will try to safeguard their investments. "Subject to compliance with applicable regulations, the Trustees, with the assistance of the investment manager, will proceed with orderly realisation and liquidation of the underlying assets, with the objective of preserving value and distributing proceeds to unitholders after discharging any liabilities of the funds," said the release.
The B&K Securities report said there were 26 entities that had borrowed Rs 7,697.27 crore, which is 100% of their borrowing, only from Franklin Templeton. Three entities have borrowed 90% to 100% of their overall borrowing from FT, amounting to Rs 2,411.52 crore. Next are 14 institutions that have borrowed more than 50% and up to 90% of their overall borrowing from FT, totalling Rs 9,601.07 crore.
These risks and exposures will determine the true extent of recovery from FT. "Within the next 12 months, Rs 8,084 crores of maturities are lined up. Some of the names include -- Piramal, Vedanta, Shriram, Edelweiss, ReNew Power (Sumant Sinha), JM Fin, Future, Clix and Munjal Group," says the B&K Securities report.
Given the economic hardships corporates are facing due to the COVID-19 lockdown, and taking a clue from the recent shadow banking crisis when many lenders had to take a haircut on their debt exposure of defaulting corporates, the possibility of some loss for FT investors can't be entirely ruled out.