Calcutta, Nov. 27: American junk bond kings are coming to India looking for bargain-basement deals by snapping up the non-performing assets (NPAs) of the nationalised banks which stack up to Rs 60,000 crore.
The junk bond brigade that is sniffing for deals include Morgan Stanley, Merrill Lynch, Verio, CompUSA and Kaiser Aluminium, say banking industry sources.
Junk bonds are typically corporate paper rated way below investment grade and, therefore, carry high risk but equally high yields.
The credit rating of a junk bond is considered “speculative” grade or below “investment” grade. This means that the chance of default with junk bonds is higher than for other bonds. Their higher credit risk means that “junk” bond yields are higher than bonds of better credit quality.
The US junk bond players have now opened talks with IndusInd Bank to help them with the process of rating and picking some of the bad debt off the books of the nationalised banks.
They have initiated talks with IndusInd Bank for helping them out in the exercise. The bank has forwarded a formal proposal in this regard to the Union finance ministry and the Reserve Bank of India.
If this happens, then it will come as a big relief to the Indian banking industry which is saddled with mammoth NPAs.
Confirming the move, managing director of IndusInd Bank Bhaskar Ghosh told The Telegraph, “They are keen to enter into a strategic alliance with us so that we can help them in picking up the NPAs. Currently, the matter is before the regulator. I expect that it will take shape within another five to six months. We have seen that the RBI has allowed foreign institutional investors to invest in debt instruments.”
Ghosh said IndusInd Bank had three options. “We can enter into a strategic alliance with the US investors or float a joint venture with them. The third option is that we may invite a local partner to form a venture.”
Ghosh refused to name the US junk bond investors that the bank was in talks with. “Well-known junk bond investors from US are in the fray,” he said.
Studies have demonstrated that the portfolios of high-yield bonds have higher returns than other bond portfolios, suggesting that the higher yield more than compensates for the additional default risk.
Ghosh said at present, yields in the US junk bonds have gone down to a meagre 2 per cent. “So they are looking towards newer markets, India being one of them,” he added.
However, Ghosh declined to name the US junk investors who are keen to buy out the bad debts of Indian public sector banks.