Franklin’s 5 debt funds in cross-hairs as Shapoorji Pallonji firm ‘defaults’ on Union Bank debt

CARE downgrades commercial paper and proposed NCD offerings of Shapoorji Pallonji, which often guarantees debt securities of other group entities to whom mutual funds have lent money

Staff Writer Oct 1, 2020

Debt repaymentFranklin MF’s five debt funds have been caught on the wrong foot with a Shapoorji Pallonji group firm defaulting on their payment to Union Bank of India. SD Corporation, whose debt is guaranteed by parent Shapoorji Pallonji and Company Private Limited (SPCPL), has defaulted on payment of a Rs 200 crore commercial paper by PSU lender Union Bank.

Following which, CARE Ratings on September 29 has downgraded about Rs 2,500 crore worth commercial paper and the proposed non-convertible debentures of SPCPL.

SPCPL is the holding-cum-operating and the flagship company of the SP Group. SPCPL is equally held by Shapoor P. Mistry and Cyrus P. Mistry through the group’s investment companies. Thus, SPCPL usually guarantees debt securities of smaller group firms when required.

For instance, debt of real estate developer SD Corporation – technically a joint venture of Shapoorji Pallonji and Dilip Thacker Group – is regularly unconditionally guaranteed by SPCPL. The NCDs are backed by a unconditional, irrevocable and revolving debt service reserve account guarantee, while commercial papers get unconditional and irrevocable corporate guarantee.

Of the Rs 700 crore debt fund exposure of SD Corporation, more than Rs 660 crore is to five debt funds of Franklin Templeton Mutual Fund viz. Franklin India Short Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund, Franklin India Income Opportunities Fund, and Franklin India Low Duration Fund. These are also the funds that are being wound up.

The rest Rs 30 odd crore exposure is to PGIM India Credit Risk Fund, PGIM India FDF-BC, PGIM India FDF-BE, PGIM India FDF-AR and PGIM India FDF-AT schemes.

Scheme wise exposure of SD Corporation debt

Scheme wise exposure of SD Corporation

SPCPL financial position, thus, has a bearing on SD Corporation.

“The revision in the ratings assigned to the Commercial Paper (CP) issue and proposed Non-Convertible Debenture (NCD) issue of Shapoorji Pallonji and Company Private Limited (SPCPL) take into account, the intimation by the IPA of non-payment of CP issue of Rs 200 crore which was due on September 25, 2020 and application made by SPCPL under OTR (One Time Restructuring) facility on September 17, 2020,” says CARE.

SPCPL, being in the construction and real estate sector, has been severely affected due to COVID-19. Cashflows from operations and asset monetisations have been adversely impacted.

CARE Ratings further notes that promoter fund raising aggregating Rs 11,000 crore which was initially planned to be completed by end of Q1FY2021 and subsequently spilled over to Q2FY2021 is unsuccessful till date despite signing a definitive agreement towards fund raising with an FII in the first week of September 2020, for Tranche 1 of Rs 3,750 crore.

SPCPL has attributed the delay in the Promoter funding closure to COVID and most recently to the stay order issued by Supreme Court on pledging the SP group’s shareholding in Tata Sons Private Limited (TSPL, the holding company of the Tata Group) until the next hearing on October 28, 2020.

“This unexpected development led to further delay in the promoter funding amidst ongoing Covid-19 pandemic crisis, thereby severely affecting the cash flows of Shapoorji Pallonji Group (SP Group). Resultantly, SPCPL applied for the (OTR) facility vide its letter dated September 17, 2020 to all its lenders, under RBI guidelines issued on August 6, 2020 and September 7, 2020. Further SPCPL has chosen not to make any debt repayments that may be due to its lenders as the OTR process has been initiated. Consequently, the CP due to Union Bank of India on September 25, 2020 was not paid despite availability of liquid funds in the form of free bank balances of Rs.530 crore and unused CP lines of Rs. 400 crore at standalone level,” CARE added.

SPCPL also acts as holding company for Afcons Infrastructure, which is a Rs 140 crore exposure for debt mutual funds of IDFC and UTI. IDFC Credit Risk Fund and UTI Credit Risk Fund are among the schemes with biggest exposure to Afcons, while the others are UTI MF fixed maturity plans.

Staff Writer

This article is written by RupeeIQ editorial staff.

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Mohammed Haseeb