Tag: bonds

Is buying bonds on Wint Wealth an attractive proposition?

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Wint Wealth, an alternative debt asset platform for retail investors, recently launched ‘Wint Bricks Nov21’ – a senior secured bonds issue from U GROW Capital (Ugrow), a non-banking financial company.

The bonds are offering an attractive 10.50 per cent (XIRR) for a little over a two-year tenure. You can invest as little as ₹10,000 which is a small ticket size for bond investments. The return is particularly enticing when seen in the context of the falling interest rates on bank fixed deposits.

But the higher returns obviously come with commensurate risk. Do your homework before you take the plunge. Here, we highlight the key points about this bond issue.

What bonds are on offer

Co-founded in November 2019 by two financial services industry professionals, Wint Wealth (earlier GrowFix) is a fixed income investment platform for retail investors. Excluding the latest offering, Wint Bricks Nov21, the platform has so far offered seven bond issues totalling ₹100 crore.

The latest one, Wint Bricks Nov21 is a ₹50 crore senior secured bond issue from Ugrow, an NBFC focused on lending to small businesses (more details later). These bonds have been bought by Wint Wealth and other wholesale buyers (or warehousing partners, as they are called) from Ugrow in a primary issue and are now being made available for sale to retail investors on the Wint Wealth platform.

The bonds mature in 27 months and are offering a return (XIRR or extended internal rate of return) of 10.50 per cent. Investors will receive monthly interest on the bonds and will be repaid 33 per cent of their principal every 9 months (see table for details). That one doesn’t have to wait until maturity to receive the entire principal is a positive on the risk front.

Though, as part principal repayments are made, the monthly interest income is bound to go down.

Usually investment returns are indicated in the form of CAGR (compound annual growth rate). But, in case of investments involving multiple inflows / outflows (periodic interest and principal repayment in the case of the Ugrow bonds) at different times throughout the investment period, XIRR and not CAGR provides the correct return calculation.

The Ugrow bonds are ‘senior secured’ which essentially means that they are secured by way of collateral (assets) on which the bondholders have exclusive charge. In this case, the Rs. 50 crore issue has been collateralized by ₹62.5 crore worth of property loans. The bonds are rated A (Positive) by Acuite Ratings.

Any individual with a demat account can buy these bonds either on the Wint Wealth platform or directly through their brokerage account. Even when you invest via the platform, the order is still placed through the broker and executed on the exchange. Note that, there is a temporary halt in the sale of these bonds and these are expected to be available for sale from December 1. These bonds are listed on the BSE and the NSE. Investors are not charged for transactions on the platform.

While the returns are enticing and buying the bonds too appears easy, let these not be the deciding factors for investing in them.

Also read: Nuts and bolts of Retail Direct Gilt account

Multiple risks

While the bond issue is backed by adequate collateral, the issue has a relatively low credit rating of A from Acuite Ratings and calls for caution. The highest-rated safest bonds are assigned a AAA rating.

Ugrow is a relatively new NBFC specializing in SME lending that began loan disbursements only in January 2019. It had assets under management of only ₹1,933 crore as of September 2021. Sector-wise, light engineering and food processing alone account for 40 per cent of its loan book. While the company’s net NPA (non-performing assets) of 1.8 per cent appears low, this is likely reflecting the impact of loan restructuring (7.2 per cent of its portfolio) undertaken by it in the September 2021 quarter.

When it comes to the collateral, what matters is how liquid it is. In this case, the issue is backed by Ugrow’s property loans. As long as the majority of the borrowers keep servicing their loans, the collateral (property loans) can offer support in the event of any default on the bonds. But, if there were to be a spike in loan defaults, then even though the underlying property can be confiscated, liquidating it to pay off the bondholders can turn out to be a time-consuming process.

Also, while it may be easy to buy the Ugrow bonds now, selling them before maturity may not so, due to lack of sufficient buyers. So, one must be prepared to hold these bonds until maturity.

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Bank of Baroda raises ₹1,997 crore via AT-1 bonds

Banking & Finance

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Bank of Baroda (BoB) has raised ₹1,997 crore via an issue of Additional Tier 1 bonds at a coupon rate of at 7.95 per cent. Bonds of ₹1 crore are unsecured, rated, listed, subordinated, non-convertible, fully paid-up Basel III compliant perpetual bonds.

Bids of ₹5,308 crore

The public sector bank informed exchanges that it has received total bids aggregating ₹5,308 crore against issue size of ₹2,000 crore. The issuance was finalised for ₹1,997 crore.

The Bank of Baroda has allotted the bonds to 21 investors.

Also see: BoB’s arm launches credit card powered by mobile app

Recently, the Union Bank of India had mopped up ₹2,000 crore via AT-1 bonds on private placement basis at a coupon rate of 8.70 per cent.

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Role reversal: India Inc ‘lending’ to banks via AT-1 bonds

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A role reversal seems to be happening in the Indian financial markets, with India Inc lending to banks instead of borrowing from them.

High returns on investments in Additional Tier-I (AT) bonds issued by public sector banks is proving to be attractive for large corporates even as bank credit to them has declined.

This development comes amid mutual funds avoiding AT-1 bonds (Perpetual Debt Instruments) due to SEBI restrictions.

Given that corporates have substantially deleveraged over the last few years and are sitting on the fence when it comes to fresh capital expenditure, they are channelising their surplus funds parked with banks and mutual funds into AT-1 bonds, according to a fund manager with an MF.

Bank credit to large industries contracted by 1 per cent in September 2021 against a contraction of 0.2 per cent a year ago, per latest RBI data.

Opportunistic investment

The investment by corporates in PSBs’ AT-1 bonds is opportunistic. Banks are offering relatively higher interest rates on these bonds to attract investors after SEBI’s March 2021 circular on “investment in instruments having special features and valuation of perpetual bonds” discouraged MFs from investing in them.

Union Bank of India recently raised ₹2,000 crore via AT-1 bonds at a coupon rate of 8.70 per cent. The PSB had earlier mopped up resources via AT-1 bonds twice — ₹1,000 crore (coupon: 8.64 per cent) in early January 2021 and ₹205 crore (8.73 per cent) late the same month.

Though AT-1 bonds are perpetual in nature, banks usually exercise the call option at the end of five years from the date of issuance. So, a corporate can earn higher returns by investing in these bonds than by parking in a five-year term deposit which fetches about 5.50 per cent.

PSBs are raising resources through AT-1 bonds as they have call options due in the current fiscal and the next on the bonds they had issued earlier. Bank of Baroda, Canara Bank and Punjab National Bank are among the PSBs believed to be considering raising resources via AT-1 route.

MFs shrink away

Among the reasons for MFs to keep away from these bonds is that their maturity is treated as 100 years from their date of issuance for the purpose of valuation as against the current practice of valuing them based on the time left for the next call option date.

So, MFs fear mark-to-market losses due to this change in the valuation norm, for if interest rates rise, the price of longer tenure bonds will depreciate much more than the short-to-medium term instruments.

By ICRA’s estimates based on industry data, MFs held 30 per cent of the outstanding Tier-I bonds and 14 per cent of the outstanding Tier-II bonds as on February 2021.

The credit rating agency assessed that the holding of Basel III compliant AT-I and Tier-II instruments is estimated at 8 per cent of the assets under management of MF schemes holding these instruments, thereby limiting the headroom for incremental investments.

ICRA, in its outlook for the banking sector for FY22, had estimated the Tier-I capital requirements for PSBs at ₹43,000 crore, of which ₹23,000 crore is on account of call options falling due on AT-I bonds, while the balance is estimated as the equity.

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Fed officials express resolve to address inflation risks

Banking & Finance

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Federal Reserve officials in discussions earlier this month said the central bank “would not hesitate” to take appropriate actions to address inflation pressures that posed risks to the economy.

In minutes released on Wednesday of the Fed’s November 2-3 meeting, Fed officials maintained that the spike in inflation seen this year was still likely to be transitory while acknowledging that the rise in prices had been greater than expected.

The minutes covered a meeting in which the Fed voted to take the first step to roll back the massive support it has provided to an economy pushed into a recession last year after widespread lockdowns to contain the Covid-19 virus.

At the November meeting, the Fed approved reductions in the amount of Treasury bonds and mortgage-backed securities it had been purchasing to put downward pressure on long-term interest rates.

Also read: The return of inflation and what central banks are doing

The committee approved reducing by $15 billion in November and another $15 billion cut in December in the $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities it had been making. The expectation was that these monthly reductions would continue until the bond purchase programme was phased out in the middle of next year.

Inflation in recent months has been hitting levels not seen in decades. Fed Chairman Jerome Powell and other Fed officials have argued that the prices pressures were likely to be transitory and fade away once problems such as supply chain bottlenecks are resolved.

Fed needs to reduce bond purchases quickly

But the Fed minutes showed a growing concern that the unwanted price pressures could last for a longer tie and the Fed should be prepared to move to reduce bond purchases more quickly or even start raising the Fed’s benchmark interest rate sooner to make sure inflation did not get out of hand.

“Various participants noted that the committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the committee’s objectives,” the minutes said.

The Feds policy rate was cut to a record low of 0 per cent to 0.25 per cent in the spring of 2020 as the Fed focused its efforts on keeping the Covid recession from spiralling into a deeper downturn.

The Fed will next meet on December 14-15 and some private economists said the central bank may decide to send a stronger signal at that time of the Fed’s intentions to address the economy’s jump in inflation.

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Global equity rally pauses as bonds hold surge, BFSI News, ET BFSI

Personal Finance

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Asian stocks dipped Friday and US futures were steady as a global equity rally paused. Sovereign bonds held gains after investors scaled back expectations for monetary-policy tightening to quell inflation.

Shares fell in Japan and Hong Kong, where developer Kaisa Group Holdings Ltd. and its Hong Kong-listed units were suspended from trading in the latest sign of stress from China’s troubled property sector. S&P 500, Nasdaq 100 and European futures fluctuated after tech shares led Wall Street to a record high.

Treasuries and the dollar held a climb. A surprise Bank of England move to hold interest rates spurred a global surge in bonds as investors reviewed the outlook for borrowing costs. Interest-rate futures had priced in two quarter-point Federal Reserve increases in 2022 but shifted the second one toward 2023. Jerome Powell this week said the Fed can be patient on hikes.

Crude oil advanced. Saudi Arabia and its OPEC+ allies rebuffed US President Joe Biden’s pleas for a large production boost. That leaves Biden with the option of tapping the US strategic reserve.

The focus turns to the US jobs report due Friday since the level of progress on employment could shift views on monetary policy again, heralding further volatility in the bond market. Stocks are riding out such gyrations so far: solid US earnings appear to have reassured investors that the economic recovery can weather pandemic-related supply chain and labor disruptions.

“You have to stay away from bonds at the moment,” Nancy Tengler, chief investment officer at Laffer Tengler Investments, said on Bloomberg Television. While there is a “little bit of a rally going on” in fixed income, “it’s difficult to see a way clear to make a lot of money, especially when real rates are negative,” she said.

Elsewhere, Australia’s central bank in a quarterly update of forecasts dismissed the prospect of a rate increase in the next 12 months, further pushing back against market expectations of a tightening cycle starting next year.

Meanwhile, China’s government bonds were set for their biggest weekly advance since July after the nation’s central bank increased its injection of short-term cash.

The latest US data showed unemployment benefits fell to the lowest since March 2020. Friday’s employment report is forecast to show nonfarm payrolls rose by 450,000 in October. Traders are likely to watch out for wages growth.

“The narrative around wage growth and very strong job creation suggests to me we are nowhere out of the woods in seeing higher bond yields going into next year,” Sean Darby, chief global equity strategist at Jefferies, said on Bloomberg Television.



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Bank of Baroda to raise up to Rs 3,000cr via Basel III bonds, BFSI News, ET BFSI

Banking & Finance

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State-owned Bank of Baroda on Monday said it will raise up to Rs 3,000 crore by issuing Basel III compliant bonds in one or more tranches. The capital raising committee of the bank in a meeting on November 1, 2021 approved the issuance of Basel III compliant additional tier I/II bonds.

The bonds are to be issued for aggregate total issue size of Rs 3,000 crore in single or multiple tranches, the bank said in a regulatory filing.

To comply with Basel-III capital regulations, banks globally need to improve and strengthen their capital planning processes.

These norms are being implemented to mitigate concerns on potential stresses on asset quality and consequential impact on performance and profitability of banks.

Shares of Bank of Baroda were trading at Rs 99.30 apiece on BSE, up 1.85 per cent from previous close. PTI KPM DRR DRR

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Canara Bank raises Rs 1,500 cr through bonds, BFSI News, ET BFSI

Banking & Finance

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New Delhi, State-owned Canara Bank on Monday said it has raised Rs 1,500 crore by issuing Basel-III compliant bonds. The bank has issued and allotted Basel-III compliant additional tier I bonds amounting to Rs 1,500 crore, Canara Bank said in a regulatory filing.

The bank said as many as 16 allottees have been issued the non-convertible, perpetual, taxable, subordinated bonds bearing a coupon of 8.40 per cent, it said.

Stock of Canara Bank closed 1.71 per cent up at Rs 201.95 on BSE. PTI KPM RUJ RUJ

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Sovereign bond yields continue to harden on rising crude price, treasury yields

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There seems to be no respite for G-sec yields even as crude prices and the US treasury yields continue to rise. The benchmark yield closed at 6.36 per cent, after having nudged the 6.4 per cent levels where a lot of buying support emerged.

After having closed below the $85-dollar mark, Brent crude has continued to persist above this level this week, even touching the $86-dollar level. On the other hand, the 10-year US treasury yield hovered very close to the 1.7 per cent mark compared to last week’s 1.57 per cent level.

On the domestic front, the Reserve Bank of India (RBI) released the monetary policy minutes. Market participants say, the minutes were fairly balanced and did not present any element of surprise.

However, with the benchmark yield hovering close to the 6.4 per cent mark, expectations were building up in the market that the Central bank would spring into action and announce some sort of bond buying that would help calm the yields.

The yields even saw some softening on Thursday on this account, having cooled three basis points to 6.33 per cent. However, since there was no announcement, the benchmark yield edged higher and closed at 6.36 per cent on Friday.

Crucial support

Dealers say that the 6.4 per cent level is crucial and despite the buying support seen in recent times, things could go south if oil prices continue to bother the market.

Siddharth Shah, Head of Treasury at STCI Primary Dealer opines that high crude prices and US treasury yields are still putting pressure on yields and these two variables are the cause for the bearishness in the domestic bond market.

“Many investors have been keenly waiting for the benchmark yield to hit the 6.4 per cent and we saw buying support coming in at these levels this week. When the yield was hovering close to this level, there was strong anticipation in the market that there would be some sort of action from the RBI in the form of bond buying, either through OMOs or through twist. Since nothing materialised, we saw the yields harden on Friday.

As far as the MPC minutes are concerned, there was no surprise. I expect the benchmark yield to find support at around 6.4 per cent but if oil prices continue their upward momentum, we could possibly see 6.5 per cent levels around which there would be expectation of Central bank support coming in by way of announcement of OT etc,” he said.

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Yields harden as liquidity concerns outweigh positive news

Banking & Finance

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Benchmark yields rose 5 basis points last week compared to the previous one pushed up by concerns on the liquidity front despite a slew of positive news.

The week commenced with the FY22 second-half borrowing calendar coming in at ₹5.03-lakh crore, which was well within the anticipated level. Then came the fiscal deficit number for April-August at 31 per cent of the Budget Estimate. The GST collections for September also came in at ₹1.17-lakh crore which is 23 per cent higher compared to the same month last fiscal.

However, yields continued to move higher as concerns on the liquidity front took precedence. For one, the cut-off on the seven-day variable rate reverse repo auction came in at 3.99 per cent last week. Compared to this, the cut-off on the 14-day variable rate reverse repo auction was at 3.6 per cent the week before.

This implies that the RBI is gradually getting comfortable paying a relatively higher rate in order to suck out the excessive liquidity sloshing around in the system.

Rate review

Bond market participants are wary that the central bank will raise the variable rate reverse repo (VRRR) auction quantum as well as the tenors and also raise the fixed reverse repo rate in the upcoming Monetary Policy.

Ananth Narayan, Professor-Finance at SPJIMR, said a lot has happened over the past few weeks that wasn’t conducive for the bond market. “Commodity prices have shot up, there have been energy shortages around the world, mainly China and the UK, and the whole confusion about the US debt ceiling also added pressure on the US treasury yields.

“As we worry about cost-push and imported inflation, the concern is whether the RBI might start reducing G-SAP and raising overnight rates next week. I believe the central bank would not want to shock the markets. They may increase the VRRR and suck out some of the excess liquidity, but would also comfort the market that the liquidity would remain on the surplus side for much longer. I think it would be a surprise if the benchmark yield goes beyond 6.30 per cent in the short term,” Narayan said.

The 10-year US treasury yield also went up to 1.56 per cent last week before cooling to 1.46 per cent. With the benchmark yield hitting 6.24 per cent, bond traders expect the yield to find solace close to the 6.3 per cent level. All eyes are now on the Monetary Policy where the crucial thing to watch out would be any potential changes in the VRRR quantum, tenor as well as the fixed reverse repo rate.

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J&K Bank gets shareholders’ nod to raise up to Rs 2,000 cr via equity, debt, BFSI News, ET BFSI

Banking & Finance

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Jammu and Kashmir Bank on Friday said it has received shareholders‘ nod to raise up to Rs 2,000 crore through equity and debt to fund its business. The shareholders at the annual general meeting on Friday approved the plan to raise equity and debt capital of up to Rs 1,000 crore each.

They approved raising of equity capital of up to Rs 1,000 crore in one or more tranches by way of rights issue/preferential allotment/private placement or qualified institutional placement (QIP) or any other approved mode, the bank said in a regulatory filing.

Also, shareholders approved raising up to Rs 1,000 crore by issuing Basel III compliant tier-II bonds in the nature of non-convertible debentures on a private placement basis.

Shareholders also cleared the appointment of Nitishwar Kumar and Mohmad Ishaq Wani as directors. PTI DP ABM ABM

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