RBI allows foreign investors to buy bonds in default
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The Reserve Bank of India (RBI) has allowed foreign portfolio investors (FPIs) to buy bonds that are either partly or fully in default, a move that gives existing investors an exit option and boosts the fledgling distress bond market in the country.
“FPIs which propose to acquire such non-convertible debentures/bonds under default should disclose to the debenture trustees the terms of their offer to debenture holders/beneficial owners from whom they are acquiring,” the central bank said in its notification.
Policymakers have been pushing firms to pare debt and clean up balance sheets as a slowdown in economic growth dragged profits, in some cases even below debt-servicing levels. Consequently, banks’ balance sheets encountered increased stress with firms beginning to default on loan and bond repayments. Banks’ bad assets are at an unprecedented level of more than Rs.3 trillion and defaults in bond repayments are increasing.
“This move essentially helps existing investors move out of an investment which they can no longer recover. There are foreign investors looking at such distressed debt, which gives them the opportunity to pick up debt at deeply discounted levels,” an investment banker said on condition of anonymity.
While there was no explicit ban on foreign investors buying such distressed debt, many investors had sought clarity from RBI after JP Morgan’s mutual fund had to suffer steep mark-to-market losses following the downgrade of the bonds of auto parts maker Amtek Auto Ltd.
In August, CARE Ratings suspended the rating on Amtek Auto’s bonds, citing lack of information, and another credit assessor, Brickworks, downgraded its debt by 12 notches. The auto ancillary firm could not repay its bonds that matured on 20 September, forcing JP Morgan mutual fund to stop redemptions of two of its funds that held these bonds. According to another investment banker, investors are hopeful a bankruptcy code will aid recovery by speeding up liquidation and restructuring of assets. “Once the code takes shape, these bonds bought at discounted levels could be up for recovery, which perhaps will be profitable in some cases,” said the second banker, also declining to be named.
RBI said issuers of such bonds will have to restructure repayment tenures keeping in mind existing norms for foreign investors that mandates them to buy bonds only of a maturity of three years or more.
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