Mumbai: The financial market is waking up to dormant risks that are ignored in calmer times.
Today, there is a lurking concern that jumpy investors may force corporate borrowers to pay back well before a bond matures by exercising features and covenants such as ‘put options’ and ‘ratinglinked acceleration’ in bonds and debentures.
‘Put options' on bonds allow investors to demand corporates to immediately pay back the debt while a ‘rating-linked acceleration’, giving investors similar power, can be triggered if credit rating of the security slips.
When the going was good, many savvy investors had insisted on such conditions to protect their exposure in the event of a rating downgrade of the bond-issuing company or default. In a downgrade, there would be provision to redeem the investment or increase the coupon int ..
“To protect our interest as a lender in few cases we negotiate for a prepayment or higher coupon in case of sharp drop in rating. We also negotiate for put options across different timelines for a long maturity debt. Obviously from a borrower’s point of view these are very stringent conditions. In a scenario when a company falls of on a rating curve their ability to refinance comes down, compounding their ALM mismatch. But most companies do not agree on such onerous terms,” said Nilesh Shah, MD ..
Today, there is a lurking concern that jumpy investors may force corporate borrowers to pay back well before a bond matures by exercising features and covenants such as ‘put options’ and ‘ratinglinked acceleration’ in bonds and debentures.
‘Put options' on bonds allow investors to demand corporates to immediately pay back the debt while a ‘rating-linked acceleration’, giving investors similar power, can be triggered if credit rating of the security slips.
When the going was good, many savvy investors had insisted on such conditions to protect their exposure in the event of a rating downgrade of the bond-issuing company or default. In a downgrade, there would be provision to redeem the investment or increase the coupon int ..
“To protect our interest as a lender in few cases we negotiate for a prepayment or higher coupon in case of sharp drop in rating. We also negotiate for put options across different timelines for a long maturity debt. Obviously from a borrower’s point of view these are very stringent conditions. In a scenario when a company falls of on a rating curve their ability to refinance comes down, compounding their ALM mismatch. But most companies do not agree on such onerous terms,” said Nilesh Shah, MD ..
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