As on November 30, 2019, the five schemes of Franklin Templeton MF had Rs 309 crore-exposure to Diligent Media Corp, whose long term rating has been downgraded by ICRA
Last week, four Franklin Templeton Mutual Fund schemes were hit when the debt rating of Essel Infraprojects was downgraded to default. Now, ICRA has downgraded the long-term rating of another Essel/Zee group firm Diligent Media Corporation Limited to [ICRA]B(Negative). This will impact Franklin MF again because it is the sole fund-house, just like in Essel Infraprojects, which lent money worth over Rs 309 crore to Diligent Media through five schemes including Franklin India ST Income and Franklin India Low Duration funds.
Diligent Media financial profile is weak, characterised by continued net losses and negative net worth and in October 2019 it announced the closure of its print editions. The downgrade of the debt security will affect the NAV of the schemes to the extent of its specific exposure. Read on.
As per prudential norms, when the ratings of debt security are downgraded, the mutual fund has to recognise the same for its exposure. This is because if the rating of a company has been downgraded, and in this case, to ‘B’ status, the valuation of the debt exposure cannot be the same.
As on November 30, 2019, the five schemes of Franklin Templeton MF had Rs 309 crore market value exposure to Diligent Media Corp. All the debt securities held by Franklin MF are set for maturity in June 2020. Beyond the debt rating downgrade, there is now a big question mark over whether Diligent Media will be able to pay the dues on time. This is because, as per ICRA, the long-term rating revision for Diligent Media Corp factors in the poor liquidity position and continued weak performance and the company faces significant debt repayments, going forward. The total repayment (including redemption premium) due on its Rs. 250-crore NCDs will be Rs 438.9 crore on June 30, 2020.
Given its weak financial profile, ICRA expects the repayment to be met through refinancing or partly through asset sale. However, in the current scenario, the Essel Group’s promoters’ refinancing ability has weakened significantly, with current pending dues of Rs 2,800-3,000 crore to financial institutions.
The promoters’ shareholding in the key listed entity of the Group, Zee Entertainment Enterprises Limited (ZEEL), reduced to 5% as on November 30, 2019 (of which, 1.1% was pledged) from 22.37% as on September 30, 2019 (of which, 96% was pledged) following stake sale of 16.5% to various financial investors. Further, despite the corporate guarantee from Zee Media Corporation Limited (ZMCL) for DMCL’s NCD and bank lines, in ICRA’s opinion, the rating does not benefit from credit enhancement.
As on November 30, Franklin India ST Income Plan, one of the poorest performers in the last 3 months, had Rs 189.3 crore exposure to Diligent Media Corp. This translates to 1.63% of its fund assets under management (AUM).
Franklin India Income Opportunities Fund had Rs 54.4 crore or 1.69% AUM exposure to Diligent Media Corp.
Franklin India Dynamic Accrual Fund, Franklin India Low Duration Fund, and Franklin India Credit Risk Fund also have 0.3-0.7% fund AUM exposure to Diligent Media Corp.
Take a detailed look at the following chart on scheme-specific Diligent Media Corp. details.
|Fund Name||Fund AUM (Rs Cr)||Diligent Media Corp exposure in market value (Rs Cr)||Diligent Media Corp exposure % of AUM||1-day NAV change % as on Dec 12, 2019|
|Franklin India ST Income Plan(G)||11589.8||189.3||1.63||-0.53|
|Franklin India Income Opportunities Fund(G)||3227.7||54.4||1.69||-0.57|
|Franklin India Dynamic Accrual Fund(G)||3981.2||27.2||0.68||-0.21|
|Franklin India Low Duration Fund(G)||5169.8||19.8||0.38||-0.11|
|Franklin India Credit Risk Fund(G)||6295.7||18.6||0.29||-0.08|
|Source: RupeeVest Portfolio as on November 30, 2019|
Diligent Media, which published newspaper DNA, made the announcement of the closure of its print editions in October 2019. As of now, Diligent Media’s liquidity is poor, as evident from its net losses and negative net worth. While it had cash and bank balance of Rs 2.7 crore as on September 30, 2019, it had a total debt of Rs. 840.1 crore, as per ICRA. It does not have any fund-based working capital lines.
Diligent Media, however, has stressed that it will continue to concentrate on publication through its digital platform– dnaindia.com. During H1 FY2020, Diligent Media reported a net loss of Rs 30.5 crore on an operating income (OI) of Rs 37.4 crore, as against a net loss of Rs 30.9 crore on an OI of Rs 53.0 crore during H1 FY2019.
These details have forced ICRA to downgrade Diligent Media debt. You can read the downgrade document here.
Update (6:20 PM, 13/12/2019)
Talking about the downgrade impact, Franklin Templeton MF told investors that the NCDs issued by Diligent Media Corp Ltd. are guaranteed by Zee Media Corp. Ltd. “The rating agency (ICRA) has not factored the corporate guarantee of Zee Media Corp. Ltd. in its revised rating. The guarantor continues to be rated CARE/BB/Negative/A4.”
Post the downgrade, the NCDs are now valued by Franklin MF at 50% of the face value with effect from December 12, 2019 based on standard AMFI prescribed haircut. Franklin MF further disclosed that the NCDs of Diligent Media Corp. are backed by personal guarantee of Subhash Chandra.
Giving a scheme-wise AUM % exposure of Diligent Media as on December 12, 2019, Franklin MF said that Franklin India Short Term (ST) Income has 1.1% exposure now, Franklin India Low Duration (0.3%), Franklin India Income Opportunities (1.2%), Franklin India Dynamic Accrual (0.5%) and Franklin Credit Risk (0.2%).
Downgrades in debt funds are common these days. The important thing to note that that scheme-specific Diligent Media Corp. exposure was limited to around 1-2%. However, the exposure of Franklin MF to Zee/Essel group firms and the resulting bad press as well as negative NAV impact, is a reminder on how debt investing is not an easy process.
Investors must choose fund-houses with a track-record of proper risk control implementation, and discipline in following the process and not getting swayed by yields alone. The recent crisis involving NBFCs or Zee/Essel group has clearly brought out the fund houses which have robust risk management processes.
Investors must understand that debt funds are market-linked and will react to changes in the valuation of the debt securities they hold. Though debt funds may be compared to bank FDs or other traditional instruments, debt funds carry interest rate risk and credit risk. During downgrades, the NAV effect will be negative.
Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial instrument including debt mutual funds of Franklin MF.
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