Informist, Monday, Oct 25, 2021

By Subhana Shaikh
 

MUMBAI – Floating rate bonds are the flavour of the season in the corporate debt market, with borrowers catering to strong demand from investors looking to guard against an expected turn of the monetary policy cycle.

Financial institutions and other companies raised 504.93 bln rupees through the placement of 473 floating rate bonds in the first six months of the current financial year, against 447.78 bln rupees through 327 such papers in the year-ago period, according to data sourced from the National Securities Depository Ltd and compiled by Informist. 

What's more, the 13% uptick in floating rate bond issuances has come on top of a base year that witnessed record-high bond issuances, thanks to the Reserve Bank of India's targeted long-term repo operations.

In Apr-Sep, funds raised through floating rate bond issuances formed 12% of the total fund raised through corporate bonds, up from 9% in the same period a year ago.

With the economy recovering from the impact of the COVID-19 pandemic, the Reserve Bank of India is seen poised for normalising its ultra-accommodative monetary policy, lifting interest rates from record lows.

During Apr-Aug, funds raised through floating rate bonds stood at 334.3 bln rupees. However, September alone witnessed a particularly sharp rise at 164.54 bln rupees through the placement of over 80 such bonds as the RBI was seen drawing closer to policy normalisation.

With bond yields widely expected to rise, investors have been seeking out floating rate papers to guard against potential losses. The coupon on such instruments resets periodically, and is linked to an external benchmark such as treasury bill rates. As a result, when interest rates rise, the coupon on floating rate bonds typically moves higher.

Unlike bonds offering fixed coupon rates, floating rate papers entail an interest rate risk for the issuer instead of the investor.

"Generally public is averse to get mark-to-market losses, and they see that the floating rate is a good way of hedging the interest rate rise in the coming time," JM Financial Managing Director Ajay Mangulia said.

Sensing the investor appetite, domestic companies have been increasingly leaning towards floating rate bonds, instead of issuing plain vanilla fixed rate papers to meet their funding requirements.

Mutual fund houses have been enthusiastic buyers of such instruments because of robust inflows into their floating rate schemes.

According to the data from the Association of Mutual Funds in India, the floater fund category witnessed net inflows of over 232.85 bln rupees in Jul-Sep as against net inflows worth 96.34 bln rupees reported in the same period a year ago.

"There were flows which came into mutual funds in the floating rate schemes, so people went ahead and bought floating rate bonds. Based on the inflows in those schemes, people demanded for these papers and corporates were quick to issue them," Mangulia added.

While floating rate bonds protect investors from a loss of capital, the benefit for issuers lies in the relatively low cost of borrowing, dealers said.

"That's a good thing for an issuer and an investor, let's say that prices go down crazily, so you'll have a capital loss which you will save on," an arranger with a private bank said.

"Today, if you see floating rate bonds all-inclusive become 100-200 basis points cheaper than fixed rate. So, why not take that risk?"

A major chunk of floating rate bond issuances came from non-banking finance companies, financial services and housing finance companies.

Last month, Housing Development Finance Corp was the biggest issuer of such papers. It raised 60 bln rupees through bonds maturing in three years at a floating coupon of a three-month treasury bill. 

Renew Sun Waves, CESC Ltd, PVR Ltd, Sundaram Home Finance, Shriram City Union Finance, Evangelos Ventures, MAS Financial Services, IIFL Finance, Edelweiss Finance & Investments, Motilal Oswal Financial Services, ICICI Home Finance Co, and Piramal Enterprises also tapped the bond market and issued floating rate bonds maturing in 2023-25.

These bonds are also linked to other varieties of benchmarks in different asset classes such as the 10-year government bond, Nifty 50, and BSE Sensex indices and to the West Texas Intermediate crude oil spot rate in the commodity market. Some are even linked to term loans and repo rates.  

Many 'AA' rated non-banking lenders and those rated even lower issued floating rate bonds last month. At a time when investors are worried about a rise in interest rates, some of these companies would not have been able to raise funds at all if they had offered to sell fixed rate bonds.

Moreover, given that the RBI is expected to tighten its monetary policy only at a gradual pace, issuers need not worry about a sharp rise in their cost of borrowing even when rates rise.

In the near term, floating rate bonds are likely to remain in favour as long as investors continue to hedge their exposure. However, the low outstanding stock and illiquidity of these papers will limit their ability to gain further traction, dealers said.  End

Edited by Akul Nishant Akhoury

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