Will junk bonds turn liquid cash for mutual funds?

Suresh P Iyengar Mumbai | Updated on June 26, 2020

The decision will be a boon for MFs , which are expecting about 1,000 debt papers worth ₹3.5-lakh crore to mature this year   -  designer491

SEBI’s move to allow trading in junk bonds will help mutual funds, say experts

Market regulator SEBI’s move to allow trading in junk bonds from July will help the mutual fund industry find value for the bonds that have been completely written off.

Mutual funds (MFs) hold bonds issued by companies such as DHFL, Cox & Kings, Jet Airways, IL&FS and Sintex Industries that have not repaid the principal even after maturity.

The decision will be a boon for MFs, which are expecting about 1,000 debt papers worth ₹3.5-lakh crore to mature this year amid the Covid-19-induced economic crisis.

Jimmy Patel, Managing Director and CEO, Quantum Asset Management Company, said the junk bond platform will create much-needed transparency on pricing when fund houses sell the defaulted bonds. To use the new platform, MFs have to hold listed bonds that have defaulted and not the other way round. Currently, most MFs’ investments are in unlisted debt papers and this move by SEBI will also encourage listing of debt instruments, he added.

Once liquidity in the junk market increases, Patel said, MFs can come out with new high-risk and high-return schemes that can investment in this market.

Mahendra Jajoo, Head of Fixed Income, Mirae Investment Managers, said the SEBI decision will create a new market for junk bonds and enable MFs to realise value for their debt investments that have been written-off completely.

Though Indian institutional investors have no appetite for junk bonds, he added, foreign investors are keen and have enough room within the cap prescribed by the RBI.

According to Nirakar Pradhan, CFA, Director, Professional Risk Managers’ International Association, non-AAA-rated corporate bonds will open up potential business for players with high risk appetite like hedge funds/traders in distressed bonds.

Omkeshwar Singh, Head - Rank MF, Samco Securities, said SEBI is trying to create new avenues to deal with emerging issues in debt, distressed assets and ensure that they do not face legal impediments.

It is an attempt to create liquidity for securities that would be rendered illiquid in case of a default and will give rise to a distressed bond market in India, where more experienced hands could come and buy these bonds, he added.

Published on June 26, 2020

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