The fund house may invoke pledged shares, corporate guarantee
In a development that would bring cheer to investors of Franklin Templeton’s debt schemes that have been wound up, the fund house has said that it has repaid bank borrowings in two schemes – Franklin India Ultra Short Bond & Franklin India Dynamic Accrual. These repayments would result in the cash position of the two funds turning positive from the negative terrain as a result of the dues outstanding earlier. The fund house wound up six of its debt schemes on April 23 due the liquidity issues caused by the COVID-19 pandemic.
“These schemes can start repayments to investors subject to a successful ‘Unitholder Vote’,” Sanjay Sapre, president, Franklin Templeton Asset Management (India) said in an e-mail to investors. “We anticipate that the ‘Franklin India Ultra Short Bond Fund’ will have in excess of 7 per cent of its AUM (assets under management) available to distribute to unitholders by the end of June 2020, and ‘Franklin India Dynamic Accrual Fund’ could have in excess of 6 per cent of AUM by this same time,” he said.
Invoking pledged shares
The fund house also said that it is looking at invoking the pledge against shares offered as a collateral by Reliance Big Entertainment and Essel Infraprojects for securities issued by them.
“Bonds issued by Reliance Big Entertainment were unable to meet their interest payment obligation due on June 14, 2020. The put option (exercise date of June 15, 2020) has not been exercised as the security is already rated “D” and the next put option date is on September 14, 2020,” Sapre informed investors. “We are exploring options for invocation of pledged shares as well as the corporate guarantee and are taking appropriate legal advice on the same,” he said.
“Five of the six impacted schemes have investments in these bonds. These bonds are held in the portfolio at a marked down value and the share collateral is adequate to cover this value as of June 22, 2020,” he stated. “Franklin is not selling the shares immediately and so it will not roil their investments. Franklin will engage with promoters and try to get the maximum value for the investments,” a person familiar with the development said.
“In one more scheme, ‘Franklin India Credit Risk Fund,’ the borrowing level has come down to 11.25 per cent from its original level of 22.27 per cent on April 24,2020,” Sapre stated. “This cash has been generated only through pre-payments, scheduled maturities and coupon payments and we would be able to accelerate monetization post a successful unitholder vote,” he added.
The schemes have received Rs 1964.21 crore from maturities, pre-payments, and coupon payments between April 24 and June 15. “However, an efficient monetization of assets and distribution of investment proceeds will be possible only after obtaining consent of the unitholders,” he said.
Issuers default on principal
Two bonds issued by the Essel Infraprojects were unable to honour their principal payment on May 22. “We have appointed a legal counsel and have initiated necessary legal actions for recovery. The schemes will continuously monitor the developments and take appropriate steps in the best interest of its unitholders,” Sapre said. “Four of the six impacted schemes have investments in these bonds. These bonds are held in the portfolio at a marked down value and the equity share collateral is adequate to cover this value as of June 22, 2020,” he said.
All legal cases relating to the winding-up of these six schemes have been transferred to a ‘Division Bench’ of Karnataka High Court (HC) by the Supreme Court, which has directed that the matter should be completed within three months. “This may reduce litigations and expedite resolution,” the fund house said.The ‘E-Voting’ and Unitholders’ Meet for the six schemes that were wound up cannot be conducted till the stay order issued by the Gujarat HC is vacated. “We will file an appeal before the Karnataka High Court seeking vacation of the stay order issued by the Gujarat High Court,” Sapre said.