Reliance Broadcast Default Spells More Trouble for Franklin Templeton Debt Schemes

Aug 10, 2020

The credit risk to Franklin Templeton's debt schemes looks to be intensifying... after the recent news of defaults by Future Group and Essel Group companies, Reliance ADAG Group companies could be the next in line.

Recently, one of ADAG companies - Reliance Broadcast Network Ltd. (RBNL) was unable to meet maturity and interest payment obligations on non-convertible debenture (NCD) it had issued.

Two of Franklin Templeton debt schemes namely Franklin India Short Term Income Plan (FISTIP) and Franklin India Corporate Debt Fund (FICDF) have exposure in the security. Notably, FISTIP is among the six schemes under winding up.

These schemes are currently invested in Reliance Broadcast Network 9.50% NCD, with a maturity date of July 20, having a put option in Reliance Capital.

As on June 30, 2020, FISTIP had exposure of 0.23% in the RBNL NCD, while FICDF had an allocation of 0.65%. The current valuation of the NCDs in the portfolio includes a haircut of 75% as per the prescribed AMFI norms.

Table 1: Total maturity value of RBNL in Franklin Templeton debt schemes

Data as on July 20, 2020
(Source: Franklin Templeton MF)

FT has clarified that this valuation only reflects the realizable value and does not indicate any reduction or write-off of the amount repayable by RBNL. It stated that it is in the process of initiating appropriate enforcement action to recover the dues from the issuer and the connected parties.

However, given that ADAG is struggling with unsustainable debt, recovery could be a difficult task. The debt at four of the biggest units of ADAG viz. Reliance Capital, Reliance Power, Reliance Infrastructure, and Reliance Naval & Engineering soared to nearly Rs 1 lakh crore as of March 2019. Another major unit of ADAG - Reliance Communications having outstanding dues of Rs 33,000 crore is currently undergoing insolvency proceedings.

As a result of the default at the major units, the credit profile of subsidiary companies have suffered. In the past, various mutual fund schemes have taken a hit on their exposure due to default by some of the group companies such as Reliance Home Finance and Reliance Commercial Finance. The group is in the process of reducing debt through monetization of assets, stake sale, and equity infusion.

Given below are some of the other companies of ADAG where Franklin Templeton currently has exposure. All these papers are currently rated 'D' (below investment grade) by rating agencies and are held in the schemes under winding up.

Table 2: Franklin Templeton's exposure in ADAG companies poses risk to investors

Scheme Name  Company  Holding (%)  Market Value ( Crore) 
Franklin India Credit Risk Fund  Reliance Big Pvt Ltd. Sr-2 (14-Jun-21)  0.06  2.07 
Reliance Big Pvt Ltd. Sr-3 (14-Jun-21)  0.08  2.76 
Reliance Infrastructure Consulting & Engineers Pvt Ltd. 12.00%(15-Jan-2021)  0.09  3.19 
Franklin India Dynamic Accrual Fund  Reliance Big Pvt Ltd. Sr-3 (14-Jun-21)  0.04  1.04 
Franklin India Income Opportunities Fund  Reliance Big Pvt Ltd. Sr-3 (14-Jun-21)  0.11  1.96 
Franklin India Low Duration Fund  Reliance Big Pvt Ltd. Sr-1 (14-Jun-21)  0.04  1.06 
Reliance Infrastructure Consulting & Engineers Pvt Ltd. 12.00%(15-Jan-2021)  0.15  3.55 
Franklin India ST Income Plan  Reliance Big Pvt Ltd. Sr-1 (14-Jun-21)  0.00  0.09 
Reliance Big Pvt Ltd. Sr-2 (14-Jun-21)  0.05  2.54 
Reliance Infrastructure Consulting & Engineers Pvt Ltd. 12.00%(15-Jan-2021)  0.10  5.48 
Data as on June 30, 2020
(Source: ACE MF)

If the schemes continue to be gripped by defaults and recovery becomes difficult, it could impact the value of money to be returned to the unitholders.

Meanwhile, FTMF President, Sanjay Sapre has written to investors that the six shuttered debt mutual fund schemes continue to receive cash flows. The schemes have received Rs 4,280 crore from maturities, pre-payments, and coupons between April 24 and July 31. In July, the schemes received cash flows of Rs 1,005 crore from various issuers.

Sapre further informed that the e-voting and unitholders meet will continue to remain suspended till they get further directions from the Karnataka High Court.

The maturity profile of schemes (cash flow projections) of the schemes as on July 31, 2020, is mentioned below:

Table 3: Maturity profile of the six wound up schemes of Franklin Templeton

Cash flow projections as on July 31, 2020
(Source: Franklin Templeton MF)

What should debt fund investors do?

Debt market conditions have improved in the past few weeks. However, there are still challenges, especially for low-rated securities, given the economic uncertainty and bleak outlook. Therefore, prefer safety of capital over returns by staying away from funds which undertake high credit risk.

It would be prudent to stay away from funds with high exposure to private issuers. Invest in debt funds that have predominant exposure to government bonds or quasi-government papers because these can offer better safety and liquidity.

[Read: Why You Need To Be Extra Careful While Selecting Debt Mutual Funds Now]

To select a scheme, essentially assess your risk appetite and investment time horizon, plus factors such as:

 The portfolio characteristics of the debt schemes

 The average maturity profile

 The corpus & expense ratio of the scheme

 The rolling returns

 The risk ratios

 The interest rate cycle

 The investment processes & systems at the fund house

In the current scenario, where interest rates seem almost bottomed out, you would do better going with low duration funds such as pure Liquid Fund and/or an Overnight Fund that does not have high exposure to private issuers.

At PersonalFN, we arrive at top-rated funds using our SMART Score Model. If you wish to select worthy mutual fund schemes, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service,  DebtSelect.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Warm Regards,
Divya Grover
Research Analyst

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