Tata Global Beverages will raise 3.25 billion rupees selling a type of low-coupon bond, sources said, the first prominent issue of its kind since the Reserve Bank of India (RBI) asked lenders not to buy such bonds citing credit risk.
Tata Global, rated AA+ by local credit rating agency ICRA Ltd, is the world’s second-largest tea group and part of the sprawling Tata conglomerate. It is issuing a three-year bond with a 3 per cent coupon and a redemption premium of 9.75 per cent, two sources with direct knowledge of the matter said.
Low-coupon bonds can be attractive for issuers who want to defer a large part of their interest payout to a later date.
The sources said the Tata Global Beverages bond does not have a sinking fund to collect accrued interest as debt matures, which would ensure payout at redemption in case of default.
Yes Bank and Deutsche Bank are the joint arrangers of the bond sale, the sources said. Both banks declined to comment.
Because banks are not eligible to invest in the bond, the potential investor pool is smaller than for other corporate bonds. Before the Reserve Bank of India (RBI) toughened its stance on such debt structures, roughly half of low-coupon bonds in India were bought by lenders, dealers said.
“There is credit risk associated with such low-coupon bond issuances in the absence of a sinking fund,” the RBI said in a letter to banks early this year, Reuters reported in February. “All such low-coupon bonds should be treated in the same way as zero-coupon bonds.
In 2010, the RBI had banned banks from investing in zero-coupon bonds unless the issuer had a sinking fund.
The RBI directive does not prevent banks from underwriting such deals, and does not apply to insurers, mutual funds, provident funds and non-bank finance companies, which also have invested in low-coupon bonds.
A Tata Global Beverages official did not immediately respond to a query.
Indian companies issued around $735 million in bonds with coupon rates of 5 per cent or below between the start of the fiscal year in April 2012 and early November of that year, according to Thomson Reuters data.
Soon thereafter, dealers said, the RBI began making queries to banks about their purchases of such bonds. In the same period a year earlier, issuance of such bonds totalled just $58.6 million.
Before the RBI’s move, Tata Steel Ltd and Indian Hotels Co Ltd, both part of the Tata group, India’s biggest business house, had issued low-coupon bonds, as had Hindustan Mittal Energy Ltd.