Bajaj Allianz-Deutsche Bank Do Not Settle Indiabulls Bond Trade

Deutsche Bank has rejected Bajaj Allianz Life Insurance Co. Ltd.’s move to annul the trade after selling Indiabulls Housing Finance Ltd.’s bonds at a steep discount, according to two people aware of the development.

The Rs 210-crore worth of bonds were to be delivered on Tuesday—the third day since Monday was a market holiday—but the trade hasn’t been settled yet, according to the people who didn’t want to be identified as they aren’t authorised to disclose the information.

Bajaj Allianz Life didn’t respond to BloombergQuint’s emailed query. Deutsche Bank declined to comment.

Bajaj Allianz Life had offloaded the bonds, with a coupon rate of 8.57-8.90 percent, at a 37-41 percent discount to the last traded price on Thursday. That pushed the effective yield-to-maturity to 31-43 percent. Two of the bonds were traded on Friday at a 15-16 percent discount to the Thursday’s trade but still higher than the coupon rate, saving mutual funds holding the securities from marking down their value. According to Morningstar, asset managers have Rs 954.50 crore exposure to the two bonds.

The transaction was part of an arbitrage product created to take advantage of the difference in the yields on Indiabulls Housing Finance’s offshore and domestic bonds, BloombergQuint reported earlier. Deutsche Bank would have traded in the offshore market as part of the strategy, and the annulment would mean that it would have to be compensated.

Bad Delivery?

Bajaj Alliance Life is said to have informed the clearing corporation and stock exchange via email that the three trades were erroneously executed, the people quoted earlier said. But the exchange can’t take any decision on the over-the-counter trade.

A third person aware of the transaction said it’s unclear how this deal will be completed if the insurer does not deliver the debt securities to Deutsche Bank.

If DB International Asia, the subsidiary of the German lender that bought the bonds, continues to seek delivery, chances are the foreign investor will have declare a bad delivery.

And in case of a bad delivery in an off-market transaction, the buyer has no recourse except to approach court since neither the trade occurred on an exchange platform nor was it guaranteed by the clearing corporation, said a fourth person aware of clearing operations.