RBI clears way for 'vulture' funds

Central bank to allow buying of bonds in default, with some conditions, easing way for banks to make their balance sheets cleaner

The Reserve Bank of India (RBI) said on Thursday it would allow foreign portfolio investors (FPIs) to invest in bonds that are in default, partly or fully, if the residual maturity is at least three years.

This means banks which have given loans to companies in stress can clean their balance sheet by selling these stressed assets. The buyers of these bonds, usually foreign “vulture funds” looking for distressed assets worldwide, can buy these at a steep discount and then put a lot of pressure on companies to perform.

Excluding financial companies, the BSE 500 entities together have Rs 27 lakh crore of debt in their books. According to RBI, 11.1 per cent of total bank advances of Rs 68 lakh crore were stressed as on March 2015. While 4.6 per cent of these loans were bad debts, the rest of the stress came from restructuring.

CLEANING BALANCE SHEET

• FPIs will be allowed to invest in bonds that are in default, partly or fully, if the residual maturity is at least three years, the Reserve Bank of India said on Thursday
   
• This means banks which have given loans to companies in stress can clean their balance sheet by selling these stressed assets
   
• The BSE 500 entities, excluding financial companies, together have Rs 27 lakh crore of debt in their books
   
• A total of 11.1 per cent of bank advances of Rs 68 lakh crore were stressed as on March 2015, according to RBI

Bankers expect many of the loans to eventually get converted into bonds and to face default. RBI's clarification means there would be a ready market for these bonds.  

These default category or “D-bonds” in market parlance are the lowest form of what are termed “junk bonds”. These are usually available at a very steep discount. While there was no restriction on foreigners buying such bonds, buyers of these were not sure whether they could take a position in one such bond issue that defaulted recently, that of Amtek Auto. It had defaulted on Rs 800 crore worth of bonds in September. Even when there was interest for these bonds, the existing investors had to make mark-to market provisions (writing down the value of the assets, based on current worth) for the full amount in their investment books.

RBI's clarification might have come in that background. While clarifying that  the revised maturity period of such bonds, restructured based on negotiations with the issuing Indian company, should be three years or more, RBI said the investment should still be within the total corporate bond investment limit, currently Rs 244,323 crore. About 40 per cent of this limit has been invested, while FPIs have exhausted their investment limit in government securities.

Globally, the distressed debt market is huge. In the US alone, it is estimated at not below $300 billion. In India, though, there is no such specific market. This could change with RBI’s clarification on the issue, say bond investors.

“This is an enabling provision for funds scouting for distressed debt. Globally, there are lots of vulture funds and hedge funds always on the lookout for companies facing a temporary liquidity problem but can honour their obligations after some years, when back in health,” said N S Venkatesh, head of treasury and executive director of IDBI Bank and chairman of Fixed Income Money Markets and Derivatives Association of India.

“With this move, corporate bonds across the spectrum are now accessible. This will help mutual funds and banks stuck with such bonds to offload their investments to risk-taking FPIs looking for very high yields. These FPIs are not run-of-the-mill regular investors but are opportunistic. Hence, this market will remain small but will surely attract lot of vulture funds in the Indian market,” said  the financial markets head of a foreign bank who did not wish to be named.

The bonds can be picked up at a steep discount of 50 per cent or more, but if the company gets back to health, can be sold almost at face value or even more, said a senior official with an FPI.