In This Issue:
- Editor’s Column – Mis-sold Credit Risk Funds Pose Problems for Credits
- Franklin India Credit Risk Fund – Portfolio Analysis
- Weekly Issuer Data – AA and Below
- Rating Upgrades, Downgrades, and Other Data
- Current Quotes – Corporate Bonds
- Other Data
Editor’s Column – Mis-sold Credit Risk Funds Pose Problems for Credits
High yield credits are esoteric in nature and carries high liquidity risk apart from credit risk and interest rate risk. Funds that invest in high yield credits are the riskiest among all fixed income funds and only true risk takers will invest in these funds, largely in anticipation of credit spreads coming down.
Credit risk funds in India have seen a very high growth in assets over the last five years, as high credit spreads and an economic upturn coupled with low interest rates drove returns on high yield bonds. However, the investor base in these funds are not institutional, they are largely retail including high net worth investors.
Credit risk funds were sold as a good tax efficient, accrual product that gives higher returns than bank deposits. The funds carried high expense ratios as commissions for selling were high. The investors took all the credit risk and returns less expenses were equivalent to other fixed income funds that carried much lower credit and liquidity risk.
When the going is good, risk is ignored but when things turn ugly, investors are caught out as they are invested in a fund that was deemed safe and steady but has suddenly turned extremely unsafe and volatile. This leads to panic and money is pulled out, leading to sharp widening of spreads.
The credit markets then tend to freeze and this leads to even good credits being unable to access markets for funds.
All this comes out in hindsight, but mis-selling never seems to go out of the system.
We have space where transactors can place their Bids or Offers for High Yield Bonds.
Please do send your comments to firstname.lastname@example.org on this newsletter, which will help us better the offering as we go along.
Franklin India Credit Risk Fund – Portfolio Analysis
Franklin credit risk fund portfolio is diversified through 10 sectors, 96% of fund holdings are diversified across 8 sectors. The finance sector has 29.1% weight in the total portfolio (Financial sector includes Banks, Microfinance, HFCs, Trading Companies). Apart from the financial sector, power has the second highest weight followed by Infra and Metal sectors. Power has 21.53% weight, and Infra has 16.74% weight in the portfolio.
Fund holds 33 papers from the financial sector, the majority of papers are NBFCs and Private Banks.
In the infra sector fund holds road construction companies, infrastructure companies, and rail infra companies. The outlook for infra sector is strong as India has a requirement of investment worth Rs 50 trillion in infrastructure by 2022 to have sustainable development in the country. Sectors like power transmission, roads & highways, and power plant will drive the investments in the coming years. However, risk is high as infrastructure companies by nature are highly leveraged and are susceptible to economic downturns.
The outlook for road construction companies is strong as only 24% of the National Highway network in India is four-laned, therefore there is immense scope for improvement. In Union Budget 2018-19, Rs 710 billion was allocated for national highways while Rs 190 billion was allocated to Pradhan Mantri Gram Sadak Yojana (PMGSY) for development of roads in rural and backward areas of the country.
In infrastructure, Franklin holds Essel Infra and Reliance Infrastructure Consulting & Engineers NCDs which are engaged in all around infra development such as EPC, Energy, Airport and Road development.
In the power sector, the fund holds transmission companies, renewable energy, and generation companies NCDs. The power sector is in stressed position but transmission sector is doing better when compared with generation and distribution. Fund majority of holding is in the transmission sector and renewable energy sector. Click here to Read Outlook on Transmission & Renewable Sector
Franklin India credit risk fund portfolio has 91.44% of bonds with credit ratings of AA & Below, but the fund does not hold any bonds which are rated below A-
Franklin India credit risk fund holds AU Small Finance Bank, Five Star Business Finance, Hinduja Leyland Finance, L&T Finance, Piramal Capital & Housing Finance Bonds whose credit ratings were upgraded recently. Syndicate Bank and Aspire Home Finance whose credit ratings were downgraded recently.
Expese Ratio- 1.03% (direct plan), 1.75% (regular plan).
Yield to Maturity- 11.22%
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