Corporate bonds' yield reaches 12pc to lure investors from govt securities

Corporate bond rates have been increased up to 12 per cent to stay competitive with risk-free government securities, a manifestation of the financial distress that companies are in while trying to raise much-needed funds.
In the prevailing high interest rate regime, businesses have started considering bonds instead of bank loans for money, but the debt instrument has proved to be costly too for the rising rates of Treasury bills and bonds.
As investors are keen on buying risk-free government securities, private organisations must lure them with a higher return.
On Thursday, the Bangladesh Securities and Exchange Commission (BSEC) accepted two proposals by Paramount Textile and RANCON Motor Bikes of zero coupon bonds. Both the companies offer interest rates up to 12 per cent.
Up until now, corporate bond rates have hovered around 10 per cent.
Paramount Textile intends to collect Tk 2.5 billion, while RANCON Tk 1.5 billion. Their main goal is to pay off a part of their bank loans to reduce finance costs.
"Interest rates of corporate bonds must be higher than that of bank deposits and risk-free debt securities," said BSEC executive director and spokesperson Mohammad Rezaul Karim.
Treasury bills and bonds are considered risk free. Hence, corporate bonds must bear a risk premium.
"Otherwise, corporate bonds will remain unsubscribed. That's why the two companies have offered higher coupon rates based on their ability," Mr Karim added.
According to the latest financial statements, finance cost of Paramount Textile jumped 55 per cent year-on-year to Tk 482 million in FY23. A larger portion of the cost was borne against bank borrowing.
Asked how Paramount Textile will curb borrowing costs if the bond rate is 9-12 per cent, company secretary Md. Robiul Islam said banks' interest rates had already crossed 13 per cent and were likely to go up further.
"The coupon rate of corporate bonds will remain fixed. It's wise to repay bank loans with the fund that will be raised through fixed-interest-rate bonds," Mr. Islam said.
Recently, some companies, including Renata, decided to repay bank loans with bond money. The perception is zero-coupon bonds will keep borrowing costs low and static.
However, the rising rates of Treasury bills and bonds have compelled them to reconsider coupon rates of bonds that they will issue.
Renata's company secretary Md. Jubayer Alam said they were optimistic about raising capital at their proposed interest rate of a little over 9 per cent.
The company's success will be depending on how investors respond after it opens bond subscription.
Some issuer companies postponed release of their bonds, fearing under subscription.
Of them, Navana Pharmaceuticals got the regulator's permission in the middle of 2023 to issue bonds at an interest rate of 10 per cent. The company recently said it would revise their coupon rate up to attract investors.
Meanwhile, a number of companies have already seen poor responses to their bonds for low coupon rates.

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