UK Edition
Hedge funds' bond dispute heads to the High Court
A group of hedge funds and investors are suing an Indian manufacturer in the London courts for forcing them to convert their bond holdings into shares after a "suspicious" spike in the stock price.
The dispute, which will be aired in the High Court for the first time on Friday, involves $200m-worth of convertible bonds issued by a Castex, a car parts company on the Bombay Stock Exchange, with assistance from Standard Chartered and Citi.
The investors took part in the sale under the condition that Castex could switch these bonds for stock if its shares reached a certain price for at least 30 days. This conversion, which could be triggered after April 2015, would enable it to cut its debt piles when it was performing well.
Shares in the firm more than quadrupled in the three months from that April, triggering the conversion, before losing 90pc of their value. The stock frequently moved more than 5pc each day, the maximum allowed in the Indian market.
This abrupt spike and collapse prompted the bondholders to complain to the Indian markets regulator, which said in November it has yet to find evidence of wrongdoing.
The bondholders have now brought their complaint to the British courts, arguing that the firm’s decision was invalid because of the questionable nature of the share price spike.
They claim that Castex should reinstate their bonds and keep paying interest as planned until the debts mature next year. However, Castex argues that Indian shares are inherently volatile, and does not accept that its stock was manipulated.
Pine River owned about $600,000-worth of these bonds through two of its funds. All of the claimants, including Highbridge, Arrowgrass, Northwest, Basso and Credit Industrial et Commerciel, were signed up to options to buy about $43m-worth of bonds from the underwriter Standard Chartered using derivatives known as Ascots.
They are also challenging Standard Chartered’s decision to launch a “forced call” on their options, which required the hedge funds to buy Castex shares at the higher option price, as it relied on Castex’s conversion announcement.
“The claimants do not allege that SCB itself was engaged in any wrongdoing. Other issues arising from this matter are in dispute between the parties, and subject to legal proceedings. As such we are unable to comment further at this stage,” said Standard Chartered.
This week's case management hearing is the start of a lengthy court process that could stretch into late 2017 or early 2018.