Trades in junk bonds touch a new record


Mumbai: Trades in Indian junk bonds hit a record last week, with a leading European bank buying the lowest graded debt of two financial services companies seeking debt resolutions.

About Rs 1,200 crore worth of outstanding bonds of Dewan Housing Finance (DHFLNSE -0.62 %) and Reliance CapitalNSE -4.81 % (RCAP) changed hands last week, eclipsing previous records. Between June and December, about Rs 700-1,000 crore of high-risk papers were sold on the exchange platform, traders said.

Deutsche Bank reportedly bought these papers for its offshore investors at 69-80 per cent discounts, implying shortening odds over the likely resolution of outstanding debt and revival of these indebted financial companies, which are among the first in their category.

“The bank is mostly buying on behalf of its offshore clients, including some large hedge funds,” said a leading capital markets trader.

Deutsche Bank declined to comment.

These secondary market transactions could drive demand for debt papers of companies that are either into administration, or trading in deep discounts, dealers said.

Both DHFL and RCAP are now rated ‘junk’ or default after they missed repayment deadlines. A liquidity crunch plagued nonbanking finance companies since September 2018, when infrastructure conglomerate IL&FS triggered a series of defaults.

DHFL bonds were traded in two tranches on Thursday and Friday last week at 80-73 per cent discounts.

A bond house associated with a large bank, select mutual funds and a new-age private bank are said to have sold those papers on which they were incurring losses, dealers said.

In the single-largest deal, for instance, DHFL bonds were traded Friday at a weighted average price of Rs 26.75 per Rs 100 face value for a trade value of Rs 500 crore.

Earlier in the week, Reliance Capital bonds worth Rs 565 crore changed hands in the secondary market in seven transactions at 70 per cent discounts. Another small trade took place Friday for Rs 25 crore.

“The bankruptcy code has significantly boosted investor confidence,” said Ajay Munglunia, MD and head of institutional fixed income at JM Financial. “The quantum may look large for India given its size and current volumes, but actually it is minuscule for global buyers that have huge capital pools to be deployed for decent opportunities.”

DHFL is seeking a debt resolution under central bank-appointed administrators, while bondholders have sought to initiate recovery proceedings this month against Reliance Home Finance, a subsidiary of RCAP.

Last Week, Reliance Home Finance CEO Ravindra Sudhalkar said that 98 per cent of debenture holders would get their full payment.

“Secondary market bond purchases (at deep discounts) are another form of owning distressed assets in India,” said Ashhish Vaidya, managing director & treasurer at DBS Bank India.


Author: Ayaan