NBFCs want to bond with Investors

- Ayushi Srivastava

NBFCs want to bond with Investors

RBI removed priority sector status on NBFCs. NBFCs are issuing non-convertible debentures (NCDs). Why? because they are restricted from borrowing from banks.

Should Retail Investors invest in NBFCs??

Companies will benefit due to long-term funding without much hassle. They could benefit from swapping these loans even when the rates fall. But retail investors must remember that higher yields are coming from companies that do not carry a high credit rating.

Risks for retail investors

NBFCs can issue perpetual bonds to investors, with a 10-year option enabling NBFCs to repay but investors cant demand repayment. After the first 10 years, if the NBFC does not repay, it cannot repay ever. NBFCs can raise subordinated debt .

INVESTMENT IN DEBT-FREE COS PAYS OFF

INVESTMENT IN DEBT-FREE COS PAYS OFF

Investors holding shares of companies such as ITC, Hindustan Unilever, Voltas and Bata India have become richer by 20-70%.

Compared with those owning scrips of Bharti Airtel, Adani Enterprises and Reliance Communications, which fell 20% and 42%

 Little or no debt. Strong Balance Sheets. Punishing those who piled up large debt on their books. Difficult economic situation and uncertain policies not many companies are keen on borrowing to financing expansion that too with interest rates as high as 13% to 14%. In such a scenario companies with little debt and high cash flows can only grow and create wealth.

 Bata India. Largest footwear retailer in India. One of the best performers. Nearly 68% return so far this year. The shift in strategy like focus on enhancing the premium portfolio, aggressive store expansion and refurbishment plans with a low debt of Rs 19 crore and over Rs 508 crore reserves as of March 2012 has led to accelerated growth for Bata.

 Eicher Motors, maker of Royal Enfield, and pizza maker Jubilant Foodworks, are classic examples of no or low debt companies generating stellar returns.

Eicher Motors has debt of a mere Rs 150 crore while Jubilant Foodworks is a debt-free company. Eicher and Jubilant respectively have given mammoth returns of 578% and 410% over the past three years.

Cheaper Funds Lure Firms To Debt Market

Debt Market
Different modes of raising finance- Most prominent is Debt Market. Non-convertible debenture and commercial papers. Need funds for less than a year-CP. Need funds for more than a year-NCD.

Reasons for attractive debt market

Improvement in liquidity conditions and increasing investor interest in debt market instruments have contributed to a fall in rates. Offers attractive interest rate differential for both issuers and investors. There are issuances worth Rs 1,500 crore-3,000 crore every week.

Debt is available at 8.5-9.5 per cent for three-six months. Investing in NCDs is a simple transaction. Challenges and risks of equity markets. Tata Power, Mittal-HPCL Pipelines, UltraTech Cement, Torrent Power and Tata Sky are expected to raise funds via NCDs. Tata Motors, Marico and IOC have been raising funds via CPs.

Statistics
Banks investments in CPs rose to Rs 21,550 crore from Rs 13,550 crore a year ago. Banks investments in bonds or debentures issued by public and private sector companies rose to Rs 1.23 lakh crore from Rs 92,200 crore, according to data from the Reserve Bank of India.

4 & 5. Hedging, speculation and Derivatives

Hedging, speculation and Derivatives

Some nationalized banks, had issued fixed interest rate, long-term bonds to augment their Tier II capital, had exchanged the coupons for JPY LIBOR-based interest in the Japanese currency, calling them as hedges and others had exchanged the fixed rate coupons into floating rate. The main objective was to reduce cost.

But could these transactions be considered as hedges?

The bonds had no price risk which could be, or needed to be, hedged. The coupons were fixed and there were no interest-fluctuation risk. The issued bonds were not marked- to-market in the books of the issuer and, therefore, there was no fair value risk either. The coupons might be high in relation to the ruling interest rates and might therefore be uneconomic But economic risks are not necessarily hedgeable price risks.

In India, economic exposures to exchange rates cannot be hedged.

Hedging is a strategy of making an investment to reduce the risk of adverse price movements in an asset. A hedge consists of taking an offsetting position in a related security, such as a futures contract. Hedging is mainly done to reduce cost and increase the earnings.

Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good such as a financial instrument. Derivatives are financial instruments whose value is based on one or more underlying assets. The most common types of derivatives are: forwards, futures, options, and swaps

What is Hedging ,Speculation and Derivatives?

The writing options cannot be considered a hedge as the regulations seem to permit writing of options for the limited purpose of reducing the cost of purchased options and that too without earning fees or increasing risk in any manner, i.e. by giving up potential opportunity gains.

Rupee fluctuation!

EH ??!!!!!!?

Hedging

Nothing can be done

Rupee invoicing

Derivatives available for hedging

Rupee invoicing. By invoicing in the domestic currency (Rupee), the business shifts the risk inherent in exchange rates to the purchaser. This technique is most advantageous when a company's market share is large. This does not eliminate foreign currency exposure but shifts from one party to another. If a currency is more volatile during a given period , this is avoided.

 Forwards: Agreement between two parties to buy/sell a specified amount of a currency at a specified rate on a particular date in the future
The depreciation of the receivable currency is hedged against by selling a currency forward. If the risk is that of a currency appreciation (if the firm has to buy a currency in future it can hedge by buying the currency forward

Futures

A futures contract is similar to the forward contract but is more liquid because it is traded in an organized exchange i.e. the futures market. Depreciation of a currency can be hedged by selling futures and Appreciation can be hedged by buying futures

Options

A currency Option is a contract giving the right, not the obligation, to buy or sell a specific quantity of one foreign currency in exchange for another at a fixed price; called the Exercise Price or Strike Price. If we need to buy foreign currency, Call Options are used if the risk is an upward trend in price of the currency, While Put Options are used if the risk is a downward trend.

What is happening in the Indian derivatives market..

OTC instruments in currency forwards and swaps are the most popular. Maturity contracts of one year or less. The typical forward contract is for 1 month, 3 months, or 6 months, with 3 months being the most common. Earnings of all the firms are linked to either US dollar, Euro or Pound

What is happening in the Indian derivatives market..

Swap usage is a long term strategy for hedging Suggests that the planning horizons for the companies are longer These businesses, by nature involve longer gestation periods and higher initial capital outlays and this could explain their long planning horizons.

What is happening in the Indian derivatives market..

Companies prefer to hedge its exposure to the US Dollar through options rather than forwards. This has been adopted due to the marked high volatility of the US Dollar against the Rupee. Options are more profitable instruments in volatile conditions as they offer unlimited upside. Firms that rely on exports for the major part of their revenues take up options. They require additional flexibility in hedging when the volatility is high. Another implication of this is that their planning horizons are shorter compared to capital intensive firms.