Bonds finally catching up

After decades of fruitless discussions, 2019-20 appeared to be the period for some concrete developments to help build a vibrant bond market.

Removals of policy bottlenecks, fast-tracking of approval, and a favourable market reality together are now inspiring an increasing number of issuers, also from diversified sectors, to go for bond financing.

In 2019, the Bangladesh Securities and Exchange Commission (BSEC) approved 13 companies to issue bonds amounting to Tk5,455 crore.

As of November 2020, the securities regulator has given its nod to 15 issuers to collect a total debt of Tk6,460 crore from capital market investors, while 16 are now waiting for approval for issuing their bonds worth more than Tk6,183 crore.

From mid-2012 to mid-2019, the BSEC approved 94 corporate bonds worth over Tk37,000 crore.

The emergence of diversified issuers

Earlier, fund collection through bonds was solely limited among banks and financial institutions in Bangladesh as they needed – and still need – to comply with capital structure regulations.

Most companies other than the financial ones preferred going for bank loans instead of bonds, which would require too much paperwork and high costs.

Now, things have begun to change with bonds turning out to be a good financing option for many companies.

For example, Aamra Networks Limited got the BSEC approval in September to issue zero-coupon bonds worth up to Tk100 crore to strengthen its Internet infrastructure. 

Md Anamul Haque, chief financial officer (CFO) of the listed Internet service company, told The Business Standard, with supportive policies and strong regulatory wills for the bond market development, it has already become more convenient to raise money through bonds.

"Now, the cost of finance from bonds and banks are almost the same for us. Availing funds from bonds and banks now takes almost a similar time," he said, explaining the company preference for bonds.

His company had waited only 40 days for the bond approval – the fastest processing at the BSEC. Also, the company got one year to get its bonds sold to investors in private placement, enough as a breathing time.

As income from zero-coupon bonds is tax free for investors other than banks and financial institutions, the bonds are widening investment opportunities for the people and institutional investors who are getting fewer returns from bank deposits, if compared to what bonds offer now.

The annual return from Aamra Networks bond will not go below 8%, while no bank can offer more than 6% in interest to their depositors at present and in many banks, it has come down to as low as 4-5%.

Aamra Networks would have availed bank loans, had it not preferred bonds this time. But, banks will demand collateral while bond investors rely on their reputation as a successful publicly listed company, of course, after going through their financial statements.

Whoever has a reputation as an issuer and needs money cannot avoid discussing bonds in management meetings nowadays.

Brac, the world's largest nongovernmental organisation (NGO), has recently applied for a Tk1,350 crore bond to fuel its microfinance programme.

Brac needs to diversify its source of funds for its fast-growing sizable microcredit programme, according to its CFO Tushar Bhowmik.

Also, Sajida Foundation, another reputed NGO, applied for Tk100 crore green zero-coupon bonds.

Summit Tower Limited, a subsidiary of Summit Communications Limited, has applied for two bonds – one zero-coupon bond and another coupon-bearing bond – worth nearly Tk220 crore.

The private company, to own and operate cell phone network towers, is looking for the World Bank funding. The development partner has demanded innovation in financing for that.

Summit Group Chairman Muhammed Aziz Khan said, "Bond costs lower than bank financing in capital intensive sectors like telecom infrastructure. And, Summit Towers wants to serve its stakeholders in the most cost-effective way."

Uzma Chowdhury, director (Corporate Finance) of Pran-RFL Group, said, "Bonds are helping direct channelisation of people's savings to businesses, who invest for the country's economic development."

Her company Pran Agro got approval for a bond worth Tk210 crore and is waiting for another one worth Tk150 crore.

Bond financing is easier than before, she feels, but it needs to be easier than availing bank loans.

"For that, it requires a market infrastructure, and the BSEC now can make it happen," she said.

Standard Chartered Bangladesh, as the first foreign bank in Bangladesh, offered zero-coupon bonds worth Tk850 crore this year and its Chief Executive Officer Naser Ezaz Bijoy told TBS recently that they were issuing the bonds mainly to offer an alternative window to depositors to park their money and also to participate in the development of bond market in Bangladesh.

The bank is offering the approved bonds in phases.

Dhaka North City Corporation (DNCC) has applied for raising more than Tk1,000 crore through the country's first-ever municipal bond for commercial building development.

As a local government institution, it has got consent of the finance ministry. Now, the final process to approach the securities regulator has started to raise funds from the capital market.

Professor Shibli Rubayat-Ul Islam, chairman of the BSEC said, "Investors can benefit more from bonds than what they get from bank deposits as interest rates have come down while bonds offer more."

"Income from zero-coupon bonds is exempted from tax which is an additional benefit for investors," added the BSEC Chairman.

With fast tracking the approval process, the securities regulator is trying to let the issuers get funds when they need it, he added.

The tailwinds and remaining challenges

Bonds have been inspired to let corporates reduce pressure on banks who lend short-term deposit funds for long-term projects, creating several liquidity imbalances in the money market in recent years.

A high-level policy priority is apparent in favour of strengthening the bond market, said Ershad Hossain, managing director of City Bank Capital Resources Limited.

The bond expert, with his long experience in international financial centres like Singapore, is now working hard to boost bond issuance in Bangladesh also to bring innovation in the sector.

His firm is serving many banks to issue perpetual bonds for complying with BASEL-iii capital requirements.

Hossain said the BSEC is inspiring bonds and it is very encouraging. Also, other government offices are moving things in a positive direction.

Trust deed registration for corporate bonds would cost 2% of the total issue size and companies were avoiding the bond path if not mandatory.

However, in the last fiscal year, the government reduced the cost to 0.1% and capped the sum at Tk10 lakh. 

"A big relief," said Ershad Hossain.

However, none of the bonds approved this year is publicly offered. Only institutional and rich individuals can buy those in private placements, while market professionals are looking for vibrant exchange trading of bonds.

Bangladesh's capital market is still synonymous to the stock market as against 326 listed companies and 37 mutual funds, the Dhaka Stock Exchange hosts only 2 corporate bonds.

The 221 treasury bonds and bills listed in the mid-2000s are also not tradable there since the day one due to lack of consensus with the central bank, which captivated the treasury bond market within its own market infrastructure module and only primary dealer banks can participate there.

Even, a large number of the listed treasury securities have already expired. But, due to non-communication with the Bangladesh Bank for a long time, the bourse kept them meaninglessly on board.

Investors, especially the institutional ones who care about portfolio diversification and risk management, need fixed income securities. But, if those are not exchange-traded ones, investors face difficulty to make an exit, said Md Moniruzzaman, vice-president of Bangladesh Merchant Bankers Association (BMBA) and also the managing director of IDLC Investments.

The BSEC decided to make all the perpetual bonds by banks tradable in the bourses. It also is compelling the corporate bonds like the Aamra Networks' one to get into the newly forming Alternative Trading Board (ATB) at the local stock exchanges so that any investor can find a buyer of the instruments without compromising fair value.

In the last national budget, the government rationalised the cost of secondary market trading of bonds and that can boost bond trading if there is sufficient scrip on board.

A year ago, a tripartite committee consisted of the BSEC, the Bangladesh Bank and the DSE officials recommended mandatory listing of all treasury bonds free of charge, bills and capped trading cost at Tk100 per transaction, which is 5-10 times higher now for buying and selling of a single unit of the instruments.  

"Hopefully, we are moving in a positive direction towards the much-needed bond market. But, we have lots of things to do to protect bond investors' rights," said the BMBA vice-president.

Like, if a company defaults on its bonds, it will not be mentioned in the Bangladesh Bank's Credit Information Bureau database of defaulters unless a bank loses money in the bonds.

Investors other than banks also need a way to report any defaulted bond, he said.