Question

Supreme Fish is a company involved in fish farming in Vietnam. Its products are sold to supermarkets as well as restaurants throughout the world. Supreme Fish has a global market share of 40% for this type of fish. Supreme Fish has a US$150 million, 15 year bond issued 2 years ago. The bond pays a premium of 500 basis points over the SOFR. The bond is not rated. However, based on its yield, an equivalent rating would be BB. An institutional investor intends to sell its holdings of US$5 million of the bonds. As a buy-side bond analyst, you have been tasked to analyse the suitability of the bond for your fund.

Assess the credit risk issues related to the bond.

Answer 1

Ans:

Risk is an unavoidable fact in any investment. However it is the ultimate decision of the concerned investor whether to take risk and what level it should be.

Rating companies examine the credit score worthiness of issuers and assign a deposit ranking primarily based on their potential to repay its obligations. Fixed profits buyers look at the scores of a company in order to set up the savings chance of a bond.

Here in our case there is no rating itself from the respective agencies for the bond in consideration eventhough it is high value bond. The bond provider will be unable to make proper interest payout or essential repayments when they are due, and consequently default. From an investor point of view for high volume bonds it is advisable to refer the credit rating and evaluate accordingly before taking any decision.

Further the rating assumed based on the yield given in question for reference is ‘BB’. Please note that the BB rating tell us that there is a higher probability for default of a debt issuer or a debt instrument. So Bonds rated BB or lower is referred to as most speculative in nature. Hence not advisable to invest.

There is another possible risk that the price of the bond may decline due to increase in the yield from the bond. It may subsequently cause further downgrading of the given rating of the bond.

Conclusion:-

Since above mentioned risks are very crucial to any investor, it is not advisable to invest at present in this high value bond.