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Templeton sells entire holding of JSPL debt securities at loss
The fund house ended with a loss of around `512 crore, which translates into 32.5% of the cost of acquisition
Mumbai: Franklin Templeton Asset Management (India) Pvt. Ltd has sold its entire holding of Jindal Steel and Power Ltd (JSPL) debt securities at a loss after the company had its ratings downgraded by credit assessor Crisil Ltd.
“JSPL securities have been sold off completely from… schemes in two tranches on 29 February and 10 March 2016. After today’s transaction, debt schemes of Franklin Templeton Mutual Fund have nil exposure to JSPL securities,” the fund house said in a statement on its website late on Thursday.
Six of its schemes had 2-7% of their corpuses in JSPL debt as of the end of January.
These holdings were pared by more than half at the end of February. JSPL made up 7.21% of Franklin India Short Term Income Plan’s corpus at the end of January. This came down to 3.69% as of 29 February.
The fund house ended with a loss of about ₹ 512 crore, which translates to about 32.5% of the cost of acquisition, distributors close to the developments said.
Thursday’s sale was made at a 10% loss from the price that the fund house had already marked down the JSPL securities to.
Santosh Kamath, managing director and chief investment officer, fixed income India, Franklin Local Asset Management, did not answer phone calls.
“The bad news on their fixed income side was getting spilled over on their equity funds too as there was a fear—from what I gather—of inflows slowing down in their equity funds as well because of all this. Hence, it was most probably a strategic move to sell off JSPL and get out,” said Manoj Nagpal, chief executive officer, Outlook Asia Capital.
On 15 February, Crisil downgraded JSPL’s debt rating to BB+/A4+, from BBB+/A3+. On 9 March, it cut the rating to “D” further to BB+/A4+.
JSPL will be in a better position to generate higher cash flows as compared with last four quarters, the company said in a statement.
“Our efforts in bringing cash into company through (i) divestment of assets and (ii) strategic collaborations through JVs (joint ventures), as previously advised will add to our cash flows, and also result in reduction in bank borrowings. We have used these difficult times as an opportunity, under the dynamic leadership of our management, to drastically cut costs to become extremely efficient and nimble footed, “the company said in an emailed response.
According to industry executives, Franklin Templeton marked down JSPL’s assets by 25% on account of a fall in prices.
To be sure, a downgrade doesn’t mean a company has defaulted. It means the company is under watch and—especially in sharp downgrades like these—the chances of it defaulting could be high.
Given that the debt market is highly illiquid, not all debt securities get traded daily. Rating agencies such as Crisil and Icra Ltd collate the prices of securities based on liquidity and surveys in the debt market every day and send the prices to the fund houses that have invested in them.
These prices depend on yield, which in turn depends on the credit rating of the scrip. When the credit rating falls, the yield shoots up and the price falls (interest rates and prices of debt securities move in opposite direction). Since fund houses are mandated to value their portfolios daily, they have to account for such falls.
According to data provided by Outlook Asia Capital, a Mumbai-based wealth advisory firm, ICICI Prudential Asset Management Co. Ltd too had JSPL securities valued at ₹ 384 crore as of 29 February.
A fund can classify an underlying asset as a non-performing asset (NPA) only three months after a default on interest and principal payments.
According to Sebi rules, in case of interest payment defaults, the fund needs to write off the scrip’s underlying value in phases, every quarter, starting six months from the default date, or three months from the NPA classification date. The fund needs to write off the value in tranches—10%, 20%, 20%, 25%, and finally 25%.
Despite the downgrade—and the subsequent fall in a debt fund’s net asset value (NAV)—a fund can still bounce back if the underlying company repays its interest and principal, eventually, when they are due.
In the case of Franklin Templeton, the principal repayment from JSPL had been due in 2018.
“But now that the fund house has sold off its paper, the schemes have had to suffer the loss permanently,” said the head of fixed income funds at a fund house who did not want to be named.
“JSPL is going through some tough times because of external factors like Chinese slowdown and the failed auction of coal blocks. It did not default on any payments to Templeton. The sell-off, therefore, seems to be a panic reaction by Templeton,” the fund manager added.
In January, India’s capital markets regulator tightened the norms for investment by debt-oriented mutual fund plans and introduced caps on how much they can invest in debt issued by an individual company, a business group or to any specific sector.
The limits will apply to new schemes and fresh investments in existing ones, the Securities and Exchange Board of India (Sebi) said. The revision in exposure limits will mitigate risks and offer investors diversification benefits.
Meanwhile, ICICI Prudential Asset Management Co. said on Friday that it was closely monitoring “the situation and developments with respect to our exposure to JSPL (0.3% of our total debt assets).”
“JSPL has demonstrated a track record of on-time repayment to mutual funds (having redeemed debt instruments around ₹ 2,300 crore since September 2015). The valuation of the investments made by various schemes in all debt instruments including JSPL is carried out at fair valuation in accordance with the valuation policy under Sebi Mutual Funds Regulations and reflects prevalent market prices” it said.
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First Published:11 Mar 2016, 12:13 PM IST
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