Stale Price on a Downgraded Corporate Bond
You chair the valuation committee of a Malaysian unit trust fund with RM 480 million in net asset value. The fund holds 12.4% of NAV in a seven-year unrated corporate bond issued by a property group that last week missed a coupon on a different series. The fund's pricing policy allows the last executed price to be used for 30 days when there is no trade, but the last trade was 41 days ago. Two brokers now quote 88 and 79 cents; the last price is 96. The dealing price for today must be struck by 5 p.m. Redemptions are running at about 3% of NAV per day. The investment team argues the issuer still has cash and the missed coupon is technical; compliance wants a 15% haircut. The trustee has asked for the basis of the price.
1. What price should the committee approve, and what evidence must be documented?
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Approving 96 would ignore a credit event and a 41-day stale price; approving compliance's flat 15% haircut would be arbitrary. The committee should treat the bond as fair-valued: use the two broker quotes as a range, analyse the missed coupon, the issuer's liquidity, recovery values and spreads on comparable property bonds. Because 88 and 79 differ by about 10%, the market is not orderly; a mid-point adjusted for the fund's large holding and for liquidity risk is defensible, but the committee must document why. Obtain independent price verification or an external valuation if internal expertise is thin. Record the inputs, the range, the chosen price and any dissent. Notify the trustee and apply the fund's pricing override policy. If the committee cannot form a reliable price, suspend dealing rather than strike a price that may transfer value between investors.
2. How should subscriptions and redemptions be handled for today's dealing cycle?
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Today's dealing cycle should not accept subscriptions or pay redemptions at a price that may be wrong. If a reliable fair value can be struck, apply the documented price and consider an anti-dilution levy or swing adjustment so exiting investors bear the cost of selling assets. If the range remains wide, defer or suspend redemptions with trustee approval under the deed; a suspension must apply to subscriptions too, otherwise new investors enter at an uncertain price. Communicate clearly to all investors, including the basis and expected review date, and notify the regulator if required. Do not let redemption pressure drive the valuation. Keep a decision log and have the trustee sign off. The aim is to protect remaining investors from dilution while treating exiters consistently with the deed and disclosed policy.