Franklin Advisors is sitting on losses of over $500m from a soured bond bet on Weatherford, a struggling energy company, after a surge in oil prices this year proved too little, too late.
Franklin, which is part of California-based Franklin Templeton, the $712bn-in-assets group, is one of many investors still nursing wounds from a downturn in oil prices at the end of 2018 which has crippled several highly indebted energy companies, despite commodity prices rebounding over the first quarter this year.
Weatherford, once one of the top providers of oil-well drilling equipment, plans to enact a restructuring plan that will see Franklin, along with other creditors, become a shareholder. Under the plan, bondholders would exchange $7.4bn of debt for a combined 99 per cent stake in the company, along with a fresh $1.25bn of unsecured bonds.
Franklin is one of the biggest holders of Weatherford’s debt, predominantly through its $76bn Income Fund, owning a combined $2.5bn of the company’s bonds. Other holders include Fidelity and Capital Group, according to Bloomberg data.
The precise loss for Franklin is difficult to calculate because it depends on the prices at which its funds bought the debt, and the interest earned over the holding period. But a conservative estimate of the loss incurred from the bonds’ fall in price, ignoring interest earned, puts it at over $500m.
Ed Perks, chief investment officer at Franklin Templeton Multi-Asset Solutions, declined to comment on the scale of the loss but said: “We actually feel comfortable with a change in the capital structure that this could be an effective transition to make. The company will be significantly less levered after that.”
One of Franklin’s largest positions is a $586m chunk of Weatherford’s $1.3bn convertible bond maturing in 2021, according to filings at the end of March and Bloomberg data. The debt pays an interest rate of 5.88 per cent and filings show that Franklin increased its holding in the bond as its price fell at the end of last year.
The bonds are now trading below 60 cents on the dollar, having traded above 100 cents for much of last year.
“We didn’t purchase these convertible bonds as a play on the stock,” said Mr Perks. “This [recapitalisation] is in the best interest of the company. As we move forward we think it will let the company perform better for its investors.”
Mr Perks noted that while the investment is large for Weatherford, the position accounts for just 2.3 per cent of the assets of Franklin’s Income Fund. Reducing leverage will improve the ability of the company to operate profitably at lower oil prices, he said.
“We still face a high level of debt that affects our ability to make investments in our company and implement further elements of our transformation plan,” said Mark McCollum, president and chief executive of Weatherford, in a statement.
“We are pleased that our noteholders recognise the long-term value Weatherford can create with an improved balance sheet as we work to achieve the full potential of our business transformation.”