Why do companies issue debentures @ 10% ; when they could get finance loan from the bank @ 8~9% ?
Business loans have higher rates around 15% or more depending on company and sector
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it is true that companies can raise money at 9-10% interest from banks. but the catch here is, these interest levels apply only for secured loans, where companies need to pledge their assets as collateral with financiers. so raising money through debentures @ 10% from public is much more attractive.
loans are generally backed by assets of companies while debentures are backed by ratings, credit worthyness, reputation of the company.
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This is trueā¦
But I always wonderedā¦ The only situation where a company cant repay debenture holders is when they go bustā¦ Say for example Kingfisherā¦
Andā¦ when they go bustā¦ they would lose all assets of the company anywayā¦
So, why bother to give the extra % to debenture holders ?
Isnāt this kind of a āmental peaceā type of thing rather than a sound business decision (by the company)?
May be there are some finer details that make issuing debentures a better option to raise money for companiesā¦
Uhmā¦ May be they are neck deep in debt already and the banks wont give them any moreā¦ May be then they are forced to raise capital through debenturesā¦ Possibleā¦
no the banks take upwards of 22% interest from companies no less, for example construction loans are whopping 23%
i have seen small finance banks issuing debentures for 18%. generally, higher the yield, higher the risk.
raising money thru debentures is usually win-win scenario when issuer is credit worthy and reputed, because, as debentures are unsecured, they get highest seniority preference during liquidation and bankruptcy process. so much so that, debenture holders are paid back even before government dues are paid.
possible. maybe debentures makes their financial statements look better than one with all their assets collateralized. or maybe they ran out of assets to pledge.
but bank (excluding cooperative banks) debentures are completely safe because they are under constant audit by RBI.
Varun, you got it right. I think the key is security. Bonds do not require a security however it has the highest payback grading when liquidation happens. A company can issue bonds at different security levels (i.e pay back sequence). While doing so, the lower sequenced bond holders would normally get a higher % of interest/coupon for their risk.
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@nithin
There are countries where investors donāt get interest in the bank deposits .so ; There are many foreign investors ready to lend money @ 1~3 % interest P.A. to the companies in india .
If this is so then why do indian companies issue bonds debentures etc @ 10~12% p.a
?
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How Can i also borrow that money @ 1~3% p.a interest . I am ready to give even 200% security also !
Its not that simple for individuals.
But back in the days, this was a popular trade arising out of interest rate differential between two countries. It was called the āCarry Tradeā, or the interest rate arbitrage, where in the capital from low interest yield countries would flow into countries with higher interest and invest in Government T Bills.
But this is not risk free - countries offering higher interest rate usually has higher inflationā¦which means higher credit rating risk, and hence a weaker currency. So there is an enormous amount of currency risk in carry trade.
Now, if you have to cover for currency risk, you hedge your position, which is an expense. Add to this other applicable charges and of course taxes. At the end of it all, the spread you make is very little, which may not be worth the effort.
Having said that, at its peak, carry trades had a spread (or carry) of about 5-6%, which made it super attractive for institutional traders. It is no longer the same.
This is the same for companies raising money outside India as well. RBI had permitted companies to do this via External Commerical Borrowings or ECB bonds, few companies even did, but it lost its flavour for the reasons mentioned above.
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if I borrow money in India @ 10% and if I am getting the same fund from foreign @ say 2% ; and do the currency hedging ; still as per your say ; it is not feasible or lucrative !
am I right ?
@nithin
@Karthik this is the reason why dollar against other currencies remains strong. Now therefore we see everyyrar rupee depreciates nearly the difference between interest rate us and india interest rates.
Does this imply if someone invested in Dow Index and Dow returning 10% is way better then nifty returning 10%. Correct @nithin
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This depends on your primary currency right? If your primary currency is USD, then a 10% return on DOW is better than 10% on Nifty but the returns on Nifty gets chopped by currency risk.
It also means that it is better for Indian citizens to invest in S&P 500 if they are giving comparable returns to nifty, right ?
But your base currency is INR right? But yeah, from a diversification point of view, maybe it is. Check this - https://coin.zerodha.com/funds/140517087.00206600/motilal-oswal-index-fund-direct-plan
Even if base currency is INR doesnāt make difference . Suppose I want to invest in Dow and usdinr is at 70. I will first convert inr to dollar then invest . And after one year Dow is up 10 percent at usdinr say at 72. Wouldnāt my gain be 10%+2.75%. Right
Yes there are commissions but very negligible if amount is good enough.
yess
No sir, I mean when in future Zerodha will be allowing to invest in US Markets then we will be getting the benefit of our depreciating currency, because then we will be buying in dollars and after redemption we will get extra 2.5% returns p.a. when dollars will get converted to INR.
isnāt it better choice to invest in dow/Nasdaq than nifty ?
because if the market bulls ; we not only make profit on the market gains but also in the currency (usd vs inr) .
And suppose (if) the market is sideways or bears ; we donāt make money on the investment (whether it is nifty or dow/nasdaq) . BUT we do definitely make the money in the currency (usd vs inr) !!!
am I right in my thinking ā¦ ?
request the experts @Bhuvan pls enlighten ā¦