A hybrid note issued by Indiabulls Housing Finance in June 2012, with the option to redeem it 10 years later, contained features of both debt and equity.
When interest rates rose at the quickest rate in at least two decades, one of India’s most prominent mortgage lenders, Indiabulls Housing Finance Ltd., opted not to redeem its rupee-denominated perpetual bonds.
With an option to redeem them 10 years later, Indiabulls Housing Finance had issued the so-called hybrid notes, which possessed the features of debt and equity, in June 2012. Instead of returning the 10.6 percent notes on June 28, the business decided to pay interest on these instruments a day early, on June 27 instead of June 28.
Investors’ enthusiasm for perpetual debt may be dampened by this unusual action. In the event of a delay, bondholders would have to wait longer for their principal to be returned, making the bonds intrinsically less valuable. Withdrawing from an option may have a significant impact on investors’ expectations throughout the globe, as was the case with Spanish lender Banco Santander SA in 2019. February’s call option on a bond by Indian insurer National Insurance Co. was not exercised.
Companies can no longer depend on low market rates to replace older hybrid bonds, therefore the issue of extending maturity risk has exploded in the credit markets throughout the world. As the Reserve Bank of India joins other central banks around the globe in hiking key interest rates to control inflation, financing costs have risen in India as well.
Due to growing interest rates and capital outflows, the implied cost of equity for non-bank lenders has risen over the last year.” “According to a business representative, “These perps are reasonably priced for investors, and the company’s present cost would be greater if it replaced this with stock.”
For three-year-old rupee corporate bonds, the average yield has risen by 148 basis points to 7.46 percent, Bloomberg data shows. According to statistics dating back to March 2002, this is the largest three-month increase in expenses ever.
If the issuer does not execute the call option, the coupon rate on such debt instruments is usually raised by at least 100 basis points. However, since the bond issued by Indiabulls Housing does not include this clause, nothing will change. Company spokespeople added that the firm would consider redeeming at an appropriate moment, given the robust demand for mortgages.
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