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Richa Sharma

In the last couple of months, about Rs 3,000-5,000 crore have been raised by way of floaters.

Mumbai , July 13

FLOATING rate bonds seem to be the flavour of the season for corporates in the unpredictable interest rates scenario.

In the last couple of months, about Rs 3,000-5,000 crore have been raised from the market by way of floaters, as floating rate bonds are popularly known in the corporate bond circle, said a treasury manager of a foreign bank.

The companies, which opted for floaters in the past one and half month include, HDFC Ltd, National Housing Bank, and Infrastructure Development Finance Corporation (IDFC).

"Investors on account of uncertainty with respect to the interest rate movement are not comfortable locking into fixed rates. Demand from investors like mutual funds and banks make it desirable for a company to opt the floating rate path, said Mr Conrad D. Souza, General Manager, Treasury, HDFC Ltd.

The Rs 400-crore issue by HDFC Ltd in June was a seven-year floating rate issue, with the base rate as 70 basis points above the one-year INBMK (One year INBMK is the Indian Benchmark popularly known as the 364-day Treasury bill). The one-year T-bill bears the rate of 4.70 to 4.80 per cent.

"Given the current volatile interest rate scenario, borrowers as well as investors, are equally uncertain regarding the pricing of new issues. As a consequence, some of the borrowers have resorted to issuing floating rate bonds. Floaters help in diluting the interest rate risk to a great extent and hence may find a better response among investors given the current market situation," said Mr Akshat Lakhera, Interest rate Trader, HDFC Bank.

Infrastructure Development Finance Corporation (IDFC) had closed the issue of five-year floating rate bonds in early July. The Rs 250-crore issue had the floating rate of 50 basis points above the one-year INBMK.

National Housing Bank (NHB) had issued a five-year floater with rate at 60 basis points above one year INBMK last month.

"The floating rate bonds give the companies access to cheaper funds than the fixed coupon instruments, there is a trend observed towards the floaters as they have a positive carry. These are beneficial at least for the first six months, because if the interest rates go down it can be swapped with the fixed coupon at a mutually beneficial price," said Mr Kinshuk Sharma, Bond Trader, ICICI Bank.

"Floaters, which are reset every six months, are the papers demanded by mutual funds, banks, primary dealers and other investors, these turn out to be cheaper than other avenues of raising funds with lesser formalities involved," said a trader with a primary dealer.

"Although in a bearish market it would be beneficial for the corporates to borrow at fixed rates even if it means paying 10-25 basis points extra but it depends to a great extent on the investors' demand. Floating rate bonds seem to bridge the gap between the demand and supply of the investors and borrowers," said a Treasury Head of a FI. The `AAA' fixed rate instrument is priced at 6.40 per cent rate of interest in the market presently with the five-year G-Sec at an YTM of 5.40 per cent.

More Stories on : Corporate Bonds | Trends | Interest Rates

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