Bonanza? A possible rerating brings cheer for LVB bondholders

Mumbai: Investors in Lakhsmi Vilas Bank’s (LVB) debt are having an extended Diwali celebration after the central bank proposed the capital-starved lender’s merger with DBS, considered Asia’s safest financier.The Reserve Bank of India (RBI) Tuesday suspended the board of the old-school private sector lender, proposing its merger with the Singapore-based DBS Bank in the first such move in India’s banking bailout history.Those bonds offered coupons in the range of 10.70-11.80 per cent with maturities commencing from February 10, 2022. They are hardly traded in the illiquid secondary market due to the recent financial weakness of the bank. With a global bank taking it over, the local lender would be re-rated, with investors assured of total returns from their tier-II bond investments.“The bank could at least be upgraded to investment grade after the merger with a strong backing from a foreign lender,” a senior executive associated with a rating business told ET. Rating companies covering the bank are now closely monitoring the takeover.There is an outstanding of Rs 368 crore in the secondary market. CARE Ratings downgraded the bank’s creditworthiness to BB-(negative outlook) in October this year, two notches lower than the lowest in the investment grade category.79294136“Unlike Additional Tier — I (perpetual bonds), LVB bond holders would not face any problem as they stand much ahead of those riskier instruments,” said Ajay Manglunia, managing director at JM Financial. “The capital adequacy ratio of the merged entity would be much higher than the standalone LVB.”DBS Bank India’s capital adequacy ratio, a gauge for capital strength, is at 15.99 per cent before the proposed merger, shows an estimate by JM Financial. The merged entity should have a total CRAR of 12.51 per cent. In Yes Bank’s case too, tier-II bond holders were repaid in full without any haircut. “LVB bond holders need not to worry with an RBI-appointed administrator running the show,” said Manglunia.LVB also proposed to sell 250 crore perpetual bonds, known as riskier quasi equity papers in market parlance and rated as single B- with a negative outlook. Due to its lower rating, mutual funds and insurers mostly stayed away from subscribing to LVB bonds. Punjab National Bank, South Indian Bank, Karur Vysya Bank, Federal Bank, Catholic Syrian Bank, and LVB Employees Pension Fund are among the investors that bought LVB bonds.

from Economic Times https://bit.ly/3lXAb2B
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