Fixed-interest corporate bonds can offer a good defence to corporate entities against rising lending rates if the debt market infrastructure is improved.
Borrowing costs have risen sharply for the last few months due to measures taken by the Bangladesh Bank to contain inflation and are expected to go up further.
In June, if an industry wanted a term loan, a private commercial bank, such as Bank Asia, was ready to provide that at an 8 per cent interest rate, according to the central bank.
Now, Bank Asia would charge 11.47 per cent for the loan, according to its website.
That means the interest rate has gone up 43 per cent over a span of just five months, leading to a spike in the finance costs of companies in Bangladesh.
All businesses from carmaker to homemaker, steelmaker to garment manufacturers to pharmaceutical companies have been experiencing the impact.
Industries are unable to plan a further expansion as it is hard to predict where the interest rate will go.
There is also no established hedging mechanism in Bangladesh to reduce risk in investments.
Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset.
For example, a coffee company depending on a regular, predictable supply of coffee beans can protect itself from an unexpected increase in coffee bean prices by entering into a future contract to buy beans at a specific price. That contract is a hedge.
In the prevailing business climate in the country, experts say fixed-rate corporate bonds could become a financing solution.
"A two-year or three-year callable bond will solve the problem. If the interest rate goes down [in future], the issuer will buy back the bond and will go for refinancing [by issuing new bonds at a lower interest rate]," said Ershad Hossain, chief executive officer of City Bank Capital.
A bond can be designed according to specific needs, which is why it is sometimes a better borrowing tool than bank loans.
"It [bonds] is also an alternative source of financing and means of diversification," added Mr Hossain.
Zero-coupon bonds can support a corporate entity by boosting its capital. On the other hand, the subscribers, which are non-financial institutions, will get tax advantage.
"So, if the stated return of the bonds is 10 per cent, investors will get yields worth 13 per cent," said the CEO of the merchant bank.
This kind of debt security does not pay interest but is sold at a deep discount. Investors reap the profit at maturity when the bond is redeemed at the par value.
Mr Hossain recommended issuing bonds to hedge against the interest rate risk.
"Zero-coupon bonds are great for issuers and subscribers," he said.
But a weak bond market comes in the way.
Globally, fixed-income debt instruments are more popular than equity assets.
According to Statista, the value of the global equity market was $98.5 trillion in 2022, while the size of the bond market was $133 trillion, of which corporate bonds accounted for nearly $45 trillion.
Bangladesh's equity market is as big as $38 billion as of now, while the corporate bond market is worth only $0.38 billion.
What's wrong with bond market?
Both demand and supply have remained tepid.
The potential issuers lack the understanding about the procedure to be followed to release bonds, whereas retail investors have shown little interest in purchasing bonds. As a result, the secondary market has remained non-functional.
Fixed transaction fees also discourage intermediaries to facilitate the trading in such instruments.
Institutional investors consider bonds issued by corporate entities as highly risky since there is no proper regulatory protection mechanism when bond issuers default on repayment.
Eight debentures listed on the Dhaka Stock Exchange matured at least one and a half decades ago, but investors have not been paid back fully.
Four companies of the Beximco Group -- Beximco Knitting, Beximco Fisheries, Beximco Textile, and Beximco Denims -- had issued four out of the eight debentures. The issuers of four other debentures were Aramit Cement, BD. Zipper, BD. Luggage, and BD. Welding.
The experience made investors skeptical about bonds, which was reflected in the disinterest shown by general investors in Beximco Sukuk when the bonds were floated in July 2021. The subscription time had to be extended several times.
Last month, IFIC Aamar Bonds were issued, using the name of the oldest commercial bank as a cover. The name suggested that the bonds were issued by the IFIC Bank but the actual issuer was Sreepur Township Ltd (STL), a newly-formed real estate company.
If an issuer defaults on repayment, institutional investors can go to the Artha Rin Adalat, but retail investors will have to file a money suit, ending up in a cobweb of the legal system.
"Bangladesh has serious problems with bond market rules and regulations. Most of the laws are ambiguous," said Dr Zahid Hussain, former lead economist of the World Bank's Dhaka office.
Moreover, trustees do not understand their role in providing protection to investors, while credit rating agencies do not have the required skills to detect the risk involved.
However, companies have recently begun issuing bonds. Last Sunday, IPDC Finance disclosed its plan to raise Tk 3 billion by issuing mortgage-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.
Theoretically, selling bonds is always better than taking loans from banks because the former removes the role of intermediaries in the process.
That reduces the cost of fund raising, said Shahidul Islam, chief executive officer of VIPB Asset Management Company Limited.
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