Franklin’s Santosh Kamath breaks silence; expects Rs 6,000 cr inflows by Sept, plans listing of securities, schemes

Speaking in a podcast, the fixed income head talks about expected cashflows, secondary sale of securities, listing of unlisted papers, and listing of MF schemes

Kumar Shankar Roy Jul 7, 2020

Santosh Kamath Franklin TempletonEver since Franklin Templeton MF announced its much-debated decision to close down six debt funds holding nearly Rs 26,000 crore investor money, if there is one person that has been constantly harangued by all on investing decisions it is Santosh Das Kamath. As the managing director and chief investment officer at Franklin Templeton Fixed Income in India, Kamath is the one with whom the buck stops with anything related to debt/fixed income in the fund-house. It did not take much time for the fund manager with a halo to be perceived as a fallen angel, as the six schemes stopped redemptions, and questions were asked about his hitherto success in yield-oriented managed credit fund strategy.

In a podcast put out by the fund-house on July 6, Kamath clears the air on a range of topics including monetisation of investments, high display of daily volatility in the NAVs of the six funds under winding-up, unlisted securities bets, Franklin Templeton being the only investor to the bond issue of certain companies, etc. Read on to know more.

Markets for AA/A rated corporate bonds

Government and RBI measures significantly increased access to liquidity for banks and were intended to induce lending. “However, due to continued risk aversion, most of this liquidity helped AAA rated issuers but many Medium Small and Micro Enterprises, NBFCs, and other participants of the financial ecosystem were unable to benefit from these measures. But slowly things are changing. A bit of risk appetite is coming back in the banking system,” Kamath says.

He thinks a bit of flow is going towards smaller companies / non AAA companies, while staying away from commenting specifically on the AA and A segment. The fund manager feels that the overall credit appetite is not yet back to the level it was in January, however, it has improved with respect to April.

The lockdown following the Covid 19 pandemic has been an unprecedented outlier event for the bond markets and Kamath hopes to see a reversal of this cycle soon with more measures coming from the central bank and the Government of India. This should see market normalising for AA and A rated companies also.

Monetization of investments in the 6 funds

Before answering the question, Kamath emphasized that these six schemes were able to generate significant cash flows even during the six months preceding the winding-up which were also turbulent times for the credit markets. To expedite the repayments to unitholders apart from the cash flows which FT keeps getting on coupon and scheduled repayments, the schemes will aim for secondary market sale of securities at an optimal cost, subject to a successful unitholders vote.

He lists out four conditions that will create an environment for the smooth secondary market sale of securities at the right price.

“In order to sell efficiently, a few things need to happen; Base curve G-Sec / ‘AAA’ should be at lower level; Liquidity should be in surplus; It should be easy for corporates to access money from the banking system; The markets should normalise risk appetite if not have high-risk appetite,” Kamath said.

Thankfully, the G-sec and AAA levels are very well behaved, they are at a significantly lower level when they were couple of months back. Kamath reckons liquidity is also abundant in the system. “We have liquidity of Rs 6 lakh crore and that too at lower cost into the system. Slowly it is getting easier for the corporates to access money from the banking system. Earlier only larger companies were getting access now NBFC and smaller companies are getting access to the banking system. Something which is expected to come back to normal is the risk appetite in the capital markets,” he added. With the economy slowly opening up and the risk appetite will keep coming back. Once that normalises, Kamath feels that could help a lot to do secondary market sales.

Each scheme has its own maturity profile and, in general, shorter duration schemes will be in a position to return monies faster. Since April 24rd till June 30th, the six schemes have received Rs 3,275 crore of cash, and further Rs 3,200 crore is expected to come between 1 July till 30 September 2020 without resorting to any secondary market sale.

“We expect to receive over Rs 6,000 crore across these funds by 30 September 2020 in the form of prepayments, regular payments, and coupons. The ultimate value realised will depend on how the situation improves going forward in terms of the overall credit cost,” Kamath said.

He said the fund-house is waiting for the economy and market to normalise and unitholders vote to happen so that the process can be started efficiently.

Additional Read: Franklin MF debt funds court update: 6 cases transferred to Karnataka HC, to decide matter in 3 months

Daily NAV volatility in to-be-wound-up funds

To this question, Kamath said that unitholders must note that NAVs are only a point in time assessment to indicate the realisable value of securities as on the prevailing date. The decision to wind up may not have a correlation to NAV movements of the scheme, he claimed.

“The change in NAV of the schemes under winding up is a reflection of the changes in the valuation of underlying securities. Normal mark to market movement is based on valuation provided by third party valuers as per SEBI regulations. Several moving variables impact valuation of security like (a) macroeconomic and market led variables such as interest rate movements, yield spreads across credit rating spectrum (b) issuer specific variables such as upgrade/downgrade, etc.,” said the managing director and chief investment officer at Franklin Templeton Fixed Income in India.

Also a particular security can get get traded at a higher or lower yield. A combined effect of these changes results in the fluctuation of NAV. The schemes under winding up are following the same valuation principles as have been followed by an ongoing scheme, he said.

Unlisted seurities exposure

In October 2019 there were regulatory changes with respect to Unlisted Securities. To a question on what action has FT taken to meet the revised SEBI guidelines, Kamath said the requirement regarding maximum exposure to unlisted securities was introduced on the 1st of October 2019. Prior to this date, there was no restriction or distinction between listed and unlisted securities. Also, all the unlisted securities held in the portfolios on the said date were grandfathered.

FT still holds more than 10% of unlisted securities in the six funds under winding-up.

Post the Oct-2019 norms, on an absolute basis, Kamath said the fund-house reduced unlisted exposure in its funds to about half of what it was on Oct 19. “Unfortunately, as a percentage of AUM, the change is not very visible as the AUM also came down sharply during that period following some portfolio challenges,” the debt fund manager said.

Lately, SEBI has come up with a 90-day window to allow the listing of the unlisted securities. “We are engaged with our issuers and listing of some of these unlisted securities can positively impact its liquidity in the secondary market,” he assured.

Additional Read: SEBI tells Franklin MF to focus on returning money; counters blame on unlisted securities curbs

Maturity profiles beyond 2025 in some funds

One major bone of contention is that despite some of these funds normally meant for very short-term investments, the papers held by these funds had very long term papers. Going by maturity profiles of some of the funds being wound up, investors would need to wait beyond 2025 to get the full 100% value.

Kamath said it is a standard practice to create a portfolio with diversified and staggered maturity profiles – some shorter than average, and some longer. This strategy allows a fund manager to take benefit of pricing anomalies across a broader yield curve, he claimed.

Most of the funds are classified not based on maturity but based on Macaulay Duration which measures the interest rate sensitivity of the portfolio. This is derived from the Macaulay duration of individual securities which in turn is calculated for the industry at large by two independent valuation agencies as appointed by AMFI. “Fund Managers can use floating rate bonds and/ or interest rate reset papers to reduce the interest rate sensitivity of the portfolio. So, while the maturity of some of the securities may be longer, the Macaulay duration is low because of the interest rate is floating, and not fixed. 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 elongated to some extent,” he explained.

In a normal market scenario, many issuers might prepay rather than pay higher market interest rates, and therefore while the maturity of some of the holdings appears long, they may get extinguished earlier depending on market conditions.

Why FT is the only investor to certain company bonds

A question that arose repeatedly is that there are certain companies where Franklin Templeton is the only subscriber to the bond issue of that particular company. Asked about his thought process when he was executing such investments across these funds, Kamath first said all the six funds have been following a philosophy over the last 10 to 15 years of investment across the rating curve.

“…all our investment decisions are in line with the stated investment objective and asset allocation. Yes, I agree that there are some common issuers across these funds. But these have been included basis the availability of cashflow and suitability of the security for the fund,” he stressed.

Kamath said that the ownership pattern of issuance is unlikely to have any impact on the credit risk. “I know distribution partners and investors have developed concerns regarding these investment decisions. I want to assure you that all investment decisions were made after appropriate due diligence by the investment management team,” he reiterated.

He gave an example of a company called Vastu Housing Finance where FT is the predominant holder and the same was upgraded last month in a difficult market environment. It shows the strength of this company. “If we go back I remember when we invested in AU Finance or Equitas Finance or Tata Sky or Mahindra World City, we were among the only investor in those companies then and it turned out quite well for the schemes. AU Finance – a small NBFC turned into itself into a bank. Equitas –same story, a small NBFC turned into itself into a bank. The reason I am giving these examples is to highlight that 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,” Kamath said.

He said the six funds have successfully delivered on this philosophy over more than a decade. Therefore, to build doubts and get impacted by rumors is a bit unfortunate, he added.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected]

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