Companies looking to raise money through bonds may not find much merit in re-issuing the same series of bonds as approved by the Securities and Exchanges Board of India (Sebi) on Thursday, say leading bond arrangers.
Sebi in a notification had said that by enabling the consolidation and re-issuance of debt-securities, the illiquid and infrequently traded corporate bonds can be re-issued which will lead to creation of a larger floating stock that can increase liquidity in the market.
However, experts say the re-issuance leads to a situation where bulky redemptions or repayments are accumulated at the maturity of a bond.
Because of this, raising funds through new series of bonds with a fresh tenure might be more attractive to corporates compared with re-issuing the same bonds.
“The issuer might not want bunching up of redemptions on the same day. If interest rates are volatile, large discounts or premiums to the par value may not be acceptable to the investors. One has to wait and watch to see the pros and cons,” said Sandeep Bagla, associate director, Trust group.
If a company issues Rs 2,000 crore worth of bonds maturing in 2025, and again re-issues the same series of bonds worth Rs 2,000 crore a year later, redemptions worth Rs 4000 crore would accumulate in 2025. This would make it harder for the company to manage the redemptions at that point in time.
“If in one maturity, too large a quantum is issued, the company’s asset liability management (ALM) may go for a toss. The market may definitely see some re-issuances but not on a frequent basis,” said Dwijendra Srivastava, chief investment officer-debt at Sundaram Mutual Fund.
Sebi had also said that by enabling call and put options — options that allow an earlier redemption of bonds — the issuer and investors would have flexibility in the redemption of debt securities.
Some bond arrangers say this option may not help maintain liquidity because if redemptions keep happening during the tenure of the bond, secondary market liquidity may fall drastically.
However, re-issuance also has its merits, say bond arrangers. Earlier, corporate bonds were not allowed to be re-issued which had limited the floating stock of a given series of bonds. This had created illiquidity in the secondary market. Once re-issuance of bonds begins, floating stock of a bond will increase, thereby, leading to improved trading volumes.
The guideline also comes as an advantage to small-sized investors as more liquidity leads to better price discovery in the secondary bond market.
“If you have larger issuances in a single bond, the secondary market volumes go up because trading activity goes higher. The corporates will gain because the spreads will be finer leading to a lower borrowing cost. But this will only happen over a period of time,” Bagla said.
* Experts say re-issuance leads to a situation where bulky redemptions or repayments are accumulated at the maturity of a bond
* Experts say raising funds through new series of bonds with a fresh tenure might be more attractive for companies than re-issuing the same bonds