IPDC sees bonds as better alternative to short-term deposits as rate rises

IPDC Finance has planned to raise Tk 3 billion by issuing mortgaged-backed zero coupon bonds to avoid interest rate risk.
"As the interest rate has been rising, depositors keep money [with banks or non-bank financial institutions] for a short-term -- for three to six months. If we issue bonds, we will get money for five years," said Fahmida Khan, chief financial officer of IPDC Finance.
The NBFI is looking to get the money for its usual business operations at a time when the rising interest rates of Treasury bills and bonds and increasing policy rate drove up the lending rates. Savers also expect higher rates against deposits.
Therefore, costs of funds have gone up.
"Banks generally collect funds from depositors. The scope is low for non-bank financial institutions. Bonds are a good instrument for raising money for non-bank financial institutions like us," said Ms Khan.
In a stock exchange filing on Sunday, IPDC Finance said its board had given its consent to the issuance of mortgaged-backed zero coupon bonds.
A zero coupon bond is offered at a deep discount on the face value which is paid at the maturity of the instrument. The difference between the purchase price and the par value is the investor's return.
Mortgage-backed securities are tradable investment vehicles made of groups of mortgages that offer interest payments similar to bonds.
IPDC Finance has Tk 69 billion disbursed in loans at present, while its total deposits amounted to Tk 98 billion as of September this year.
Its interest spread is 2.23 per cent as of October, according to the Bangladesh Bank, which is much lower than the industry average of 3.39 per cent.
The low interest spread has been eroding profits of the financial institution.
The CFO said the zero-coupon bond would be the fourth such instrument issued by the company to borrow funds.
"If the bond is a zero-coupon bond, it is good for capital adequacy," she added. .
NBFI sector's overall
performance
Most NBFIs have been struggling with a huge amount of non-performing loans (NPL), a liquidity crisis, and an extreme squeeze in their net interest margin in recent quarters.
Their poor performance is blamed on issues of non-compliance and embezzlement. On top of that, liquidity pressure in the money market impacted the growth of assets of the NBFIs.
Intense competition with banks to get deposits worsened the liquidity crisis.
NBFIs' overall profit halved year-on-year in the first nine months of this year, owing to rising costs of funds, rendered by the shrinking interest spread.
The gap between borrowing and lending rates came down to a historic low at 0.16 per cent on an average in July this year. The spread has gradually increased after the central bank removed the interest rate cap in July.
However, IPDC Finance's spread remained below 3 per cent and stood at 2.23 per cent in October. As a result, its profit fell 70 per cent year-on-year to Tk 180.45 million in the nine months through September this year.
Renewed interest in issuing bonds
As the lending rate has been climbing after the removal of interest rate cap, some companies moved to issue bonds to reduce the costs of borrowing.
Advanced Chemical Industries (ACI) last week decided to borrow Tk 1.30 billion by issuing convertible zero coupon bonds for loan repayment and fresh investment.
The issuance of the bond "ACI 20 per cent Convertible Zero Coupon Bond", first of its kind, is subject to regulatory approval.
Convertible zero coupon bonds are transferrable into shares.
"The prime objective of issuing the zero coupon bonds is to repay the loan provided by existing financiers," said Muallem A Choudhury, executive director (finance and planning) of ACI.
"The rest of the borrowed money, if there is any, will be injected into the company's business as fresh investment," he added.
The maturity period of the bonds is five years with yearly redemption. It means 20 per cent value of the bonds will be repaid to investors each year at a 10.5 per cent discount rate.
Of the yearly amount repaid, 20 per cent will be converted into ACI shares.
Shares of ACI have remained stuck at Tk 260.20 each for more than a year.
Along with the discount or interest, investors, excluding banks and insurance companies, will also get tax exemption on the returns received from the bonds.
Meanwhile, the stock market regulator gave its permission last week to the National Housing Finance and Investment to issue zero-coupon bonds worth more than Tk 3.74 billion.
This would be a non-convertible, fully redeemable, and unsecured zero-coupon bond.
The bonds will be sold at a 9 per cent discount on the face value through private placement to institutional investors and high-net-worth individuals. The unit price of the bonds will be Tk 100,000.
The company will spend this fund to provide loans in the housing sector. The bonds will be listed on the alternative trading board of the stock exchanges.

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