Insolvent DHFL’s Bonds Attract Clutch Of Adventurous Investors
Outstanding bonds issued by insolvent Dewan Housing Finance Corp. have seen some interest from high risk-taking investors as the resolution process moves closer to completion. These bonds, like securities of a few other entities that have gone into default, have traded in small lots at yields higher than 100% at times.
According to data from I-Peritus Solutions and Services, a quantitative finance and research platform, there are close to 157 debt securities of DHFL available in the market. Of these, 19 bonds have traded at least once in the past six months.
Among the most traded is a bond with a coupon rate of 8.90%, maturing in June 2021. This security has traded 41 times since June, at an average weighted yield of between 80-477%, data from BSE shows.
“The interest in defaulter bonds could be mainly coming from distressed asset investors, hedge funds and some fixed-income investors, who are keenly watching the debt resolution process of some of these distressed companies, and expect to generate returns based on their recovery process,” said Rajesh Pawar, chief executive of I-Peritus.
As more clarity emerges on DHFL’s asset recovery plan, the yields at which these securities have traded have dropped—implying lower risk in investing in them.
So far, in December, a total of six trades took place across three DHFL bonds, of which the security maturing in 2026 traded twice at a yield of nearly 49%, according to data from the exchanges. The same paper was trading at 51.42% average yield in November and at 80-84% yield in June.
The yields at which bonds of distressed firms are being traded is determined by their estimated recovery time and the likely haircut that the lenders would assume, said Ajay Manglunia, managing director and head-institutional fixed income at investment banking firm JM Financial. “If the recovery looks healthier, the bond could trade at a 50-60% yield or lower, and if the recovery cycle is longer, the yield is pegged close to 100%.”
The DHFL resolution process has moved into its fourth round of bids with three bidders submitting offers for the entire portfolio.
To be sure, DHFL isn’t alone in drawing interest from those willing to take a high-risk bet on stressed debt.
Besides DHFL, bonds issued by Yes Bank Ltd., before its reconstruction plan was finalised, and IL&FS group companies, which are still under resolution, also saw trading interest in the past six months, according to I-Peritus data.
“While DHFL saw higher secondary debt market activity as its resolution inched closer, Yes Bank bonds have seen trading activity because investors are expecting its asset quality and financials to improve as it is now re-capitalised, after getting rescued by State Bank of India,” said Manglunia.
In the case of the distressed IL&FS Group, bonds issued by IL&FS Financial Services (three securities) and IL&FS Transportation Network (one security) have seen sporadic but small trades. Data available on exchanges didn’t provide a weighted average on these trades.
For IL&FS group companies, as debt recovery is largely dependent on the underlying assets held by its subsidiaries, only those units with a large asset base have seen their bonds getting traded, an institutional fixed income investor from a domestic financial services firm told BloombergQuint on the condition of anonymity. Some large foreign banks, some high-net-worth individuals are also buying defaulter bonds as they seek returns from the arbitrage between the asset recovery amount and the price at which the paper is being sold, the investor said.
While investors in these securities are typically sophisticated high net-worth individuals or institutions, the trades can help other institutions exit their investments.
“As the market for these bonds open up and investors who understand distressed debt enter the space, it will benefit retail and institutional investors such as insurance companies and mutual funds, who would be able to offload these otherwise illiquid papers,” said Pawar.