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Zero-coupon bonds come to the rescue of cos in keeping borrowing costs low

BABUL BARMAN | May 27, 2024 00:00:00


Amid monetary tightening, businesses have been inclined to issue zero-coupon bonds to collect necessary funds.

In the five months to March this year, at least eight companies received regulatory approval to collect more than Tk 42 billion through zero-coupon bonds that would not require immediate interest payment.

During the time, three banks -- Rupali Bank, Shahjalal Islami Bank, and Southeast Bank - were allowed to raise Tk 20 billion by issuing subordinated and perpetual bonds.

By April this year, the lending rate had accelerated to reach 13.55 per cent, causing finance costs of borrowers to swell. Interest rate is likely to go up further following the recent policy rate hike by 50 basis points.

To keep the repayment burden under control, companies moved towards debt securities, particularly zero-coupon bonds.

However, the debt instrument is costly too. The only window of relief that comes with zero-coupon bonds is that the companies will get time until maturity to pay back. Such bonds trade at a discount and are redeemed for the face value at maturity.

The coupon rate for this type of bonds has already been increased up to 15 per cent to stay competitive with risk-free government securities.

Since institutional investors have been concentrating their investments in Treasury bonds and bills, private institutions must offer a higher return to attract investors, market operators say.

"Interest rates of corporate bonds must be higher than that of bank deposits and risk-free debt securities," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

Otherwise, corporate bonds will remain under-subscribed or unsubscribed.

On the other hand, private enterprises have been considering issuing bonds, instead of relying on bank loans, to bring down borrowing costs.

"The issuers prefer zero-coupon bonds nowadays as this type of bonds would help them enjoy flexibility in cash flow," said Akramul Alam, head of research at Royal Capital.

While other corporate bonds require interest payments semi-annually, an issuer of zero-coupon bonds will not have to worry about repayment until the maturity, at least five years later.

Tax incentives and relevant cost cuts remain as other encouraging factors, added Mr Alam.

Beximco aims to raise Tk 15 billion through non-convertible, redeemable, and unsecured zero-coupon bonds. To attract investors, it offered a discount rate of 15 per cent, the highest in the market at present.

An investment of Tk 100,000 will yield a return of Tk 175,000 at the end of five years, including the principal amount, according to the prospectus.

Of the money to be raised, Beximco will provide Tk 10 billion as a loan to Sreepur Township for the development of the Mayanagar project, while the remaining Tk 5 billion will be used to repay existing bank loans.

Renata, one of the leading drug makers, issued zero-coupon bonds worth Tk 6.60 billion in February to partially repay high-cost bank credits.

Company secretary Md. Jubayer Alam said they were able to raise the fund at the proposed interest rate of 9-10 per cent at a time when the bank deposit rate was below 10 per cent.

"There are factors, such as a company's reputation, previous record of payments, and cash flow positions, which investors consider while deciding to buy bonds."

Paramount Textile and RANCON Motors were given permission to issue zero-coupon bonds in February this year to repay bank loans with bond money.

The popular perception about zero-coupon bonds is that it keeps borrowing costs low and static.

Navana Pharmaceuticals initially planned to float convertible and redeemable bonds in the middle of 2023 at a 10 percent coupon rate but had to revise the rate later to attract investors.

Meanwhile, several companies have seen poor responses to their bonds due to low coupon rates.

Alif Industries, National Polymer Industries, and Mir Akhter Hossain have failed to complete subscription of the bonds they issued.

"Bonds cannot be sold forcefully," said Mahfuzur Rahman, company secretary of Alif Industries.

Earlier, National Polymer Industries failed to complete its bonds' subscriptions even by extending tenures several times. Finally, it was able to gather Tk 490 million while the target was Tk 3 billion.

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