A corporate bond fund holds Rs 90 crore of Hemavrat Cables bonds (3% of NAV) with an interest cover covenant of 2.0x; the latest results show 1.7x. The bondholders can accelerate, waive for a fee, or reprice. What do you recommend, and what does each path do to the fund?

Vote to reprice: waive the breach only in return for a higher coupon, security and a cash sweep. On illustrative assumptions, accelerating costs the fund about Rs 28 crore of expected value because it can trigger the default it fears, and a fee alone earns Rs 0.45 crore while leaving about Rs 6.1 crore of expected loss. Repricing turns the breach into better pay and better protection.

A landlord whose tenant pays late can evict, or can renew the lease at a higher rent with a larger deposit. Eviction leaves an empty flat. A covenant breach does not mean the company has missed a payment; it means the lenders have gained the right to act early, and the value lies in using that right well. Hemavrat's interest coverOperating profit divided by interest expense: how many times over the company can pay its interest from current profit. has fallen from the required 2.0x to 1.7x. It is still paying, but the cushion has shrunk from Rs 120 crore above interest to Rs 84 crore.

Put rough numbers on each branch, and say they are assumptions. Accelerating demands Rs 1,200 crore at once from a company earning Rs 204 crore; refinancing a stressed borrower quickly is hard, so default becomes likely, say 70%, with 55% recovery. On those numbers the fund's expected loss is about Rs 28.3 crore, 94 basis points of NAV, from enforcing a right meant to protect it.

A waiver for 0.5% pays Rs 0.45 crore today and changes nothing else; if default risk is 15% with 55% recovery, expected loss is Rs 6.07 crore. Repricing by 1% adds Rs 0.9 crore a year on the fund's Rs 90 crore; taking security over plant and a cash sweepA term that sends a set share of the company’s surplus cash to repay lenders early, shrinking the debt as the business earns. lowers default risk and lifts recovery. The branch that asks for most in return for its patience comes out best.

Yes, and naming it is what separates a good answer. A 1% step-up on all Rs 1,200 crore of bonds adds Rs 12 crore of interest, which pushes cover from 1.7x down to 1.55x. Squeezing a stretched borrower too hard can cause the problem you are pricing for. So trade the size of the step-up against protection: a smaller coupon increase in return for security and a sweep that shrinks the debt is often worth more than a large coupon on an unchanged claim.

Two fund-specific points close the answer. The breach will likely trigger a rating review, and a downgrade moves the bond's valuation and may breach the fund's own rating limits, so the risk team needs to know today. And the fund owes its investors the vote that maximises recovery value, not the one that makes the problem disappear from the portfolio fastest.