Rolta Missed Payment Ringfenced as Funds Focus on India Progress

  • Rolta faces ‘idiosyncratic’ issues so impact less: Fidelity
  • India high-yield dollar bonds gained 11.5 percent this year

Fund managers say India’s economic progress, including changes to protect investors during bankruptcies, are helping ringfence the nation’s dollar bonds from the impact of nonpayment by a software maker.

Fidelity International, BEA Union Investment Management and Baring Asset Management said they don’t expect Rolta India Ltd.’s failure to pay a coupon to derail the rally in India’s junk debt. A grace period for the firm to make a $6.8 million interest payment on its 10.75 percent notes ended on June 15, after it didn’t honor an original May 16 deadline. It threatens to be the first default in a decade on an Indian dollar bond excluding convertible notes and securities issued through restructuring.

Investor sentiment toward India has turned positive as Prime Minister Narendra Modi’s government focuses on fiscal discipline, opening markets, cutting red tape and protections for investors, including overhauling the country’s century old bankruptcy law in May. The nation’s U.S. currency high-yield bonds have returned 11.5 percent this year, the fourth best gain on an Asian index compiled by Bank of America Merrill Lynch.

Idiosyncratic Case

“The issues that Rolta faces are idiosyncratic and it has less of an impact on the broader Indian high-yield market,” said Bryan Collins, portfolio manager at Fidelity International, which managed $272 billion in assets globally as of March 31 and doesn’t own Rolta debt.

While India high-yield bonds have lost about 0.7 percent this month, the declines have been led by Rolta’s notes due 2019, which slumped 16.4 percent this month. By contrast, Vedanta Resources Plc 6 percent bonds due 2019 lost just 2 percent this month and JSW Steel Ltd.’s 4.75 percent bonds due 2019 gained 0.6 percent. Schroder Investment Management expects that Rolta’s troubles will lead to growing scrutiny of high-yield Indian note issuers.

"We haven’t seen a default in the India offshore bond space over the last 10 years," said Raymond Chia, head of credit research for Asia ex-Japan at Schroder. "We expect that Rolta’s default, if it happens, will awaken investors."

Offsetting Factors

S&P Global Ratings said in a press release dated June 15 that Rolta "expects the bond trustee to use the company’s interest reserve account, maintained under the indentures, to make the coupon payment.” Those expectations were conveyed to S&P in discussions with Rolta management, Ashutosh Sharma, an analyst at the rating company, said Thursday. Four calls to Rolta went unanswered and there was no reply to an e-mailed request for comment to Ramakrishna Prabhu, the company’s chief financial officer

“If something like this happens, obviously it will add on the negative sentiment but all in all, with the recent reform and bankruptcy rules, that could offset some of this negative impact,” said Sean Chang, head of Asian debt investment at Baring Asset Management, which managed $35.7 billion of assets globally as of April 2016.

Limited Spillover

India passed a new bankruptcy law last month to help speed the clean up of $131 billion of impaired debt and avert a crisis at its banks. Modi’s government also decided this week to liberalize the world’s fastest-growing airline market.

Rolta’s debt tumbled after Glaucus Research Group California LLC said in April last year it was betting against the company’s bonds because of the large amount of money it had raised.

“The industry this company is in is quite different from the other Indian issuers," said Pheona Tsang, head of fixed income at BEA Union Investment in Hong Kong, which manages $6.8 billion of assets and doesn’t own Rolta bonds. "I don’t see any spillover from this credit to other Indian bond performance. Overall the country has improved a lot in terms of fundamentals and the government reforms taking place, although slowly and gradually. I’m still positive on India.”

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