After Rolta downgrade, junk bond investors seek more protection

MUMBAI: Overseas investors looking to buy junk bonds of Indian companies are demanding more protection against potential default. They are seeking access to even assets of subsidiaries after the recent downgrade of Rolta India. Rating agency Fitch Ratings had revised the outlook on Rolta India's long-term foreign and local currency issuer default ratings (IDRs) to negative from stable, and affirmed the IDRs and senior unsecured rating at 'BB-'.

The rating company said that due to higher working capital requirements, Rolta's leverage and free cash flow (FCF) will be worse than previous expectations despite higher forecast Ebitda. Indian companies have been offering high yields while borrowing overseas. Investor appetite has fallen after such bonds issued by software company Rolta dropped on allegations that it misrepresented facts. "Investors look for more guarantee if the corporate is rated junk," said an executive with foreign bank."The appetite for junk bonds has come down. Investors are looking for guarantees from subsidiaries of the corporate in such cases."

Companies that have issued high-yield or junk bonds overseas include Century, which offered a coupon rate as high as 10.25% to raise $175 million in November, Essar Steel offering 9.5% for $375 million and Greenko Dutch giving 8% for $550 million.

Indian high-yield-bond covenants offer stronger protection for investors than the average bond issued in other Asian countries and globally, said Moody's report.

The recent bond deals for fourrated high-yield Indian companies -Indiabulls Real Estate (B1 stable), Delhi International Airport (Ba1 stable), Lodha Developers (Ba3 stable) and Reliance Communications (Ba3 stable) -provide stronger protection for investors than bonds issued by other rated high-yield companies in Asia and globally . Lodha has the strongest overall covenant quality score and Indiabulls has the weakest of the four, the report said.

Reliance Industries, rated BBB+ -a notch above the lowest investment grade -raised $1 billion by selling offshore bonds at 4.125% with a 10-year maturity this year. Final pricing was derived after adding 240 basis points over and above the 10-year US Treasury bond yield. Initially, investment bankers had expected a 265 bps spread.