High-yield bond fund tipped for 2021

High-yield bond fund tipped for 2021

A high-yield bond fund is expected to emerge by next year to provide liquidity for non-investment-grade debenture issuers, with investment limited to a select group of investors.

The Securities and Exchange Commission (SEC) board on June 16 approved the move to set up a high-yield bond fund to help non-investment-grade debenture issuers.

The regulations for setting up such a fund have been established and the fund should act as bridge financing for non-investment-grade debenture issuers and help to stabilise the high-yield bond market, said SEC secretary-general Ruenvadee Suwanmongkol.

The fund also provides a new investment option for high-net-worth investors via the oversight of a professional fund manager, instead of direct investment in high-yield bonds, Ms Ruenvadee said.

The coronavirus outbreak affected business operations on a broad scale, causing a ripple effect on the interest and principal payments of debenture issuers.

The fund will be set up as a non-redeemable fund with a maturity period of at least two years. Automatic redemption and extension of fund selling units are permitted if the fund manager can gradually return money to unit holders.

The fund can be set up as either a mutual fund or an investment trust. Investment is limited to institutional and high-net-worth investors.

The fund can invest in high-yield bonds with no complications over good governance, with the investment portion making up at least 60% of total net asset value (NAV). Investment can be made in both the primary and secondary markets, while the rest of the portion can be invested in other asset classes allowed for fixed-income funds except for distressed bonds.

High-yield bonds in the fund are stipulated as companies or debt instruments that have been assigned with credit ratings lower than the investment-grade level.

The fund can diversify its assets into other debenture issuers at a limit of no more than 25% of NAV at the date of investment.

The offering process must be as concise as selling a high-risk debt instrument, and risk must be clearly disclosed.

Debenture issuers are stipulated to use the fund to raise capital to pay off existing bond liabilities or for business operations, but they must pay off the existing bond liabilities first, with a mechanism in place to manage or monitor the use of funds in accordance with the conditions.

"Adjustment of the criteria mentioned above will provide opportunities for those interested in establishing a fund that invests in high-yield bonds to be able to operate in a more flexible framework," Ms Ruenvadee said. "If this fund is established, there will be benefits to issuers, investors, the capital market and the economic system."

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