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Finance Management | Building a Junk-bond Market in India & its Impact on Overall Economy

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Building a Junk-bond Market in India and its Impact on Overall Economy

- by Ankit Chetan & Sudhanshu Duggal *

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Junk Bonds

Definition - A speculative bond rated BB or below. "Junk bonds" are generally issued by corporations of questionable financial strength or without proven track records. They tend to be more volatile and higher yielding than bonds with superior quality ratings.
"Junk bond funds" emphasize diversified investments in these low-rated, high-yielding debt issues. Thus, these are high-yielding, high-risk securities issued by companies with less robust finances.

Junk Bonds & Buyouts

Leveraged Buy Out (LBO) is a purchase of a private company with borrowed funds. In general, it is defined as the acquisition, financed largely by borrowing of all the stock or assets of a hitherto public company by a small group of investors. A portion of the long-term financing is secured by the firm's fixed assets. Subordinated debt either unrated or low-rated debt, referred to as junk bond financing, is used to raise the balance of the purchase price.

As per international buyout practices, a target company's assets serve as security for the loans taken by the acquiring firm. The latter repays the loans out of the cash-flow of the acquired company, its profits or by selling its assets. globally, many leveraged buyouts have been financed through junk bonds. This is not the practice in India.

In the absence of norms governing M&A financing, banks have gone in for asset financing.

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* Contributed by -
Ankit Chetan & Sudhanshu Duggal,
National Institute of Industrial Engineering (NITIE),
Mumbai.


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