Floating Rate Bonds Suggested As Interest Rate Cushion

Due to the uncertainty on the interest rate front, banks have suggested to merchant bankers that they should advise their corporate clients to issue bonds at floating rates. There is a feeling that the interest rates have bottomed out and could increase from October onwards.

At present, the coupon on privately placed bonds is in the band of 13.50 per cent to 15.25 per cent. We would prefer to invest in an instrument at a floating rate because it will be a hedge if the interest rates go up, says the treasury head of a public sector bank.

There has been a glut of fixed coupon bond issues in the debt market targeted at the institutional investors, banks and provident funds.

 

While IDBI is offering 13.5 per cent, corporates with a rating of AAA are successfully able to raise money at 14.5 to 15 per cent. Investors are looking for over 15.25 per cent in case of corporates with a rating of AA.

The merchant bankers point out that the response to the floating rate bond issued by Industrial Development Bank of India (IDBI) has been lukewarm. The coupon on the IDBI bond is linked to that of the 10-year central government paper.

At the current level this works out to 13.55. Bankers, however, say that the coupon on IDBI bonds are relatively low when one considers that IRFC is offering over 14 per cent.