Cos seeking bank guarantee now buying PSB perpetual bonds | Economic Times

Mumbai: Perpetual bonds are back in vogue as companies buy these quasi-debt instruments for interest rate arbitrage play, gaining as much as 200 basis points, dealers said.Companies that seek bank guarantees now prefer to buy perpetual bonds instead of subscribing to low-yielding bank fixed deposits. The companies could be local contractors or exporters who need bank guarantees to bid for projects and consignments.Yields on these riskier securities sold by State Bank of India and Bank of Baroda dropped as much as 60 basis points in the past few months. Since the beginning of the financial year, the benchmark gauge fell about 25 basis points, pointing to a sharper rally in perpetual papers. A basis point is 0.01 percentage point.“Some corporates are finding it financially viable to pledge perpetual bonds of SBI and BoB as they seek to buy bank guarantees,” said Anil Chopra, group director at Bajaj Capital. “The scene is unlikely to change as long as the interest rate cycle does not change.”“The drop in select perpetual bond yields negates the scare about the instrument,” said Ajay Manglunia, head of debt capital market at JM Financial. “The demand seems to be coming from corporates.”To buy a bank guarantee, a business house normally subscribes to FDs, which now yield 5.5-5.6 per cent with a five-year maturity. The interest income falls if it is adjusted for a 1 per cent commission. An SBI perpetual bond yielded about 7.15 per cent compared with a 7.74 per cent coupon.Bank of Baroda bonds yielded about 8.05 per cent versus 8.5 per cent coupon attached to its primary issuances a few months ago. When private lender Yes Bank did not repay perpetual bondholders, citing compliant norms attached to those securities, it was a first in the country and raised questions about such investments.These papers are known as additional tier-I bonds and bear a higher risk than normal bonds.