Franklin MF in talks with bond issuers to list unlisted debt on bourses

Fund house exploring ways to expedite secondary market sales to boost liquidity

Franklin Templeton Mutual Fund (MF) is in talks with bond issuers to get unlisted debt securities listed on the bourses. This is to shore up liquidity to some of these unlisted securities.

In a podcast, Santosh Kamath, managing director and chief investment officer-fixed income, Franklin MF, said: “We are engaged with our issuers and listing of some of these unlisted securities can positively impact their liquidity in the secondary market.”

These podcasts have been part of a regular communication by the fund house to keep investors of the six schemes under wind-up informed and abreast of developments.

Kamath clarified that after norms restricting exposure to unlisted debt were announced last October, the fund house reduced exposure to unlisted debt in its funds to half of what it was in October.

However, the reduction was not palpable as the percentage of assets under management, too, came down sharply, following these changes.

Last month, the markets regulator, Securities and Exchange Board of India (Sebi), gave a three-month window to unlisted bond issuers to get their securities listed.

The fund house is also working on getting the schemes under wind-up listed on the exchanges, as required by Sebi’s new norms, so that investors with urgent need of liquidity can avail of this facility. 

Apart from cash flows through coupon repayments and scheduled maturities, the fund house is looking at secondary market sales at optimal cost, subject to approval from unitholders’ voting. With the economy slowly opening up, the risk appetite will keep coming back, said Kamath. “Once that normalises, it could help us a lot in doing secondary market sales,” he added.

 

 

Responding to a common question raised by investors and distributors on why the funds under wind-up have made investments in papers with long-term maturities, even though some of these funds were meant for very short-term investments, Kamath said it was a standard practice to create a portfolio with a diversified and staggered maturity profile.

“…some shorter than average, some longer. This strategy allows a fund manager to take the benefit of pricing anomalies across a broader yield curve,” he said.

He added that in a normal market scenario, many issuers might prepay rather than pay higher market interest rates and therefore, while maturity of some of the holdings appear long, they could get extinguished earlier, depending on market conditions.

Kamath pointed out that most of the funds were classified based not on maturity, but on the Macaulay Duration, which measures the interest rate sensitivity of the portfolio.

“Fund managers can use floating rate bonds and/or interest rate reset papers to reduce the interest rate sensitivity of the portfolio. While maturity of some of the securities may be longer, the Macaulay Duration is low because of the interest rate being floating, not fixed,” said Kamath.

“However, while disclosing the maturity profiles of these schemes, we have used final maturity dates for some securities while calculating projected cash flows. Hence, the repayments look somewhat elongated,” he added.

On Franklin Templeton MF being the only subscriber to bond issuances of certain companies, Kamath said the ownership pattern of an issuance is unlikely to have any impact on the credit risk. He also pointed out past instances where widely held papers across MFs have defaulted. Meanwhile, he spoke of the recent case of Vastu Housing Finance, in which the fund house was the dominant investor, and the same was upgraded last month in a “difficult market environment”.

He shared examples of AU Finance, Equitas Finance, and Tata Sky, where it was the only investor, and these decisions turned out well for the exposed schemes.

“…this has been a part of our investment philosophy in the past too and the same has played out well with meaningful outcomes for our investors. The six funds have successfully delivered on this philosophy over more than a decade. Therefore, to build doubts and get impacted by rumours is a bit unfortunate,” he said.