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Priya Nair

Mumbai, Nov. 20 A recent trend emerging in the corporate bond market is that of companies issuing floating rate bonds, as they try to take advantage of the lower interest rates.

Both Power Finance Corporation and NPCIL had issued floating rate bonds in addition to their fixed rate bonds. PFC issued a three-year floating rate bond, which had a reset at the end of every year. The bond was benchmarked to the one-year INBMK. (The INBMK is an Indian benchmark and captures a one-year constant maturity security, presents a yield for government securities for a respective tenor). The yield on the PFC bond was INBMK plus 130-140 basis points.

Market participants are expecting more corporates to issue floating rate bonds so long as interest rates remain at the current low levels.

Mr B. Prasanna, Managing Director and CEO, ICICI Securities Primary Dealership Ltd, said the yield curve is steep and since the yield is linked to the one-year G-Sec the issuer will save on the first coupon rate, as it is lower.

For instance, PFC’s 10-year bond had a coupon of 8.7 per cent, while the three-year floating bond had a coupon of 6.6 per cent.

Investors, too, are agreeable to invest in a floating rate bond if interest rates are lower, as there is a chance of the rate getting adjusted during the remaining period of the tenor. Whereas, in case of a fixed rate it gets locked in, at the lower rate, for the entire tenor, said Mr Krishnan Sitaraman, Director, Crisil Fund Services.

More Stories on : Corporate Bonds | Interest Rates

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