Ripple effects of Franklin Templeton Mutual Fund's decision to wind up six debt schemes and block redemptions indefinitely due to liquidity issues spread to the asset management industry and the corporate bond market. Anticipating widespread redemption demand in near future, several mutual funds, in a chest building exercise, sold top-rated debt securities aggressively in the bond market.
Little wonder investors reportedly have begun pulling back money out of other credit-risk schemes or bond funds holding lower-rated papers on worries of losses.
The risk aversion sentiments have led to yields rising even on paper of highly rated entities, including public sector companies and financial institutions. The differential or spread between yields on bonds of these companies, both governments owned and privately held, and similar-maturity government papers widened by about 20-30 basis points (bps). A basis point is 0.01 percentage point. Dealers said the broadening of spreads to this extent is unusual and is a sign of risk aversion. During the global financial crisis and after the IL&FS default, the spread had widened by up to 50 bps.
In an unprecedented decision, Franklin Templeton Mutual Fund on April 23 has shut six of its open-ended debt funds, effective April 23. The six schemes include, Franklin India Low Duration Fund (FILDF), Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund, and Franklin India Income Opportunities Fund (FIIOF).
All these schemes followed the high-risk, high-return credit risk strategy. The fund house will now sell the underlying securities of all these funds over time and pay off their investors in a staggered manner.
Templeton will keep trying to liquidate its portfolios as much as it can. Of the money it receives, Sanjay Sapre, President, Franklin Templeton – India has assured that the fund house will keep paying all investors, big or small, proportionately and in instalments. He added that the fund would not charge the asset management fee with effect from April 24, the winding date, for as long as it takes for them to redeem the funds entirely. Meanwhile, the segregated portfolios of these schemes will continue independently.
Indian Railways Finance Corp (IRFC) on Friday sold three-year paper at 6.19%, about 20-25 bps higher than the usual. Rural Electrification Corp cancelled a primary bond sale as investors demanded 7.40% for three-year paper, deemed steep by the borrower. Both are state-owned companies.
Vedanta's bonds, rated AA with a two-year residual maturity, changed hands at 11%, which, according to market participants, verged on distress levels. A large finance company, which deals in vehicle funding, saw a set of subdebt paper trading at about 15%.
The mutual fund industry swung into firefighting mode with the Association of Mutual Funds in India (AMFI), the main lobby group, saying the issue is limited to six schemes of one fund house. Top industry executives said there was no need for a special liquidity window to be opened by the Reserve Bank of India (RBI) as it did in 2008 and 2013 because the borrowing limits of most fund
houses are yet to be exhausted. The speculation in the industry is that Franklin has exhausted its borrowing limit, which is 20% of a fund's net assets for a period of six months. This could not be independently verified.
