Franklin winds 6 debt funds due to COVID impact

Franklin Templeton AMC  announced yesterday that it will wind up six bond funds that took credit risk. As per the fund house –

 

There has been a dramatic and sustained fall in liquidity in certain segments of the corporate bonds market on account of
the Covid-19 crisis and the resultant lock-down of the Indian economy which was necessary to address the same. At the
same time, mutual funds, especially in the fixed income segment, are facing continuous and heightened redemptions.

 

In short, Franklin Templeton is finding it difficult to sell existing portfolio credits required for redemption demands. The fund house has thus decided to wind up the entire scheme.

The six schemes are:

Franklin India Low Duration Fund
Franklin India Ultra Short Bond Fund
Franklin India Short Term Income Plan
Franklin India Credit Risk Fund
Franklin India Dynamic Accrual Fund
Franklin India Income Opportunities Fund

Why “wind up” a scheme?

First a quick recap (and a simplistic scenario) of why a fund house can find it difficult to sell existing portfolio bonds? Say a fund has 60% in liquid bonds and 40% in slightly more obscure and less liquid bonds. The fund manager holds 40% in obscure bonds because there is investor demand for extra yield. The extra yield comes at a price – by going down the quality curve. The manager plans to hold all to maturity and believes that there will be no defaults.

When markets turn sour as they have during the COVID led crisis, those 40% bonds go from being less liquid to completely illiquid – there are no buyers for them. If during that time there is redemption demand, then the AMC will first sell from the 60% of liquid bonds to pay the investors leaving the fund. Once that 60% pool is exhausted, the AMC now has no choice but to deny redemptions and wind up the scheme so that whatever portfolio is left can be equally shared amongst all unit-holders.

So what just happened – is this same as a “bank run”?

No, this is not a bank run. In a bank run more people ask for their money than is in the bank’s lockers – a situation that can arise because of how fractional reserve banking works. In a bank run, there is a significant chance you will never see your money again – at least the portion above deposit insurance limits. This is different, the asset backing your units are with the fund house but the current environment makes it hard for them to sell those assets.

What happens next?

1/ Pursuant to SEBI rules, Franklin will ask unitholder approval for winding up. Winding up is the best outcome here to avoid further adverse selection.

2/ The above 6 schemes are closed for all transactions. As and when Franklin can redeem the bonds or they mature, the money will come to the scheme to be distributed to the unitholders proportionally.

When will I get my money?

Franklin has communicated that they will return money to unitholders as and when they realize a sale or a bond matures. From Franklin,

 

It will be our endeavour to liquidate the portfolio holdings at the earliest opportunity, to enable an equitable exit for all investors in these unprecedented circumstances. We would also continue to explore opportunities to monetize assets through secondary transactions, once the market stabilizes. We will aim, subject to the limitations under Regulation 41, to make regular payments to investors from portfolio maturities, coupon and pre-payments, once the borrowings in the funds have been paid back. 

 

If you are a unitholder, you will get detailed communication from Franklin Templeton.

Here is the complete circular from Franklin: FT notice-of-winding-up-final-230420

More here: FT-email

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