{"id":133766,"date":"2022-09-08T11:40:59","date_gmt":"2022-09-08T15:40:59","guid":{"rendered":"https:\/\/44.250.171.167\/?p=133766"},"modified":"2023-04-25T08:32:50","modified_gmt":"2023-04-25T12:32:50","slug":"why-are-nbfcs-suddenly-using-zero-coupon-bonds-to-raise-debt","status":"publish","type":"post","link":"https:\/\/alphastreet.com\/india\/why-are-nbfcs-suddenly-using-zero-coupon-bonds-to-raise-debt\/","title":{"rendered":"Why are NBFCs suddenly using Zero Coupon Bonds to raise Debt?"},"content":{"rendered":"\n<p>One of the most significant lessons in the Indian Banking literature is that firms should never borrow for a short term when their asset\u2019s cash has a long time horizon.&nbsp;<\/p>\n\n\n\n<p>Or to put it more simply, <strong>you don\u2019t buy your house with credit card debt.<\/strong><\/p>\n\n\n\n<p><strong>Thus, it is vital for firms to ensure that their debt repayment horizon is longer than the time taken for the firm\u2019s assets to generate revenue.\u00a0<\/strong><\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Indian Banking Environment<\/h4>\n\n\n\n<p>IL&amp;FS is the prime example for this cautionary tale. The infrastructure lender was financing itself with short term credit to construct infrastructure projects that pay out several years down the line. When the short term creditors came knocking at IL&amp;FS doors but IL&amp;FS had all the money locked up in construction projects that would pay back several years later. This inevitably led to IL&amp;FS downfall.<\/p>\n\n\n\n<p>Dominant NBFCs like <a href=\"https:\/\/44.250.171.167\/rationale-behind-bajaj-finances-success\/\" target=\"_blank\" rel=\"noreferrer noopener\">Bajaj Finance<\/a>, <a href=\"https:\/\/44.250.171.167\/dominance-of-aavas-financiers-limited\/\" target=\"_blank\" rel=\"noreferrer noopener\">Aavas Financiers<\/a> and <a href=\"https:\/\/www.cholamandalam.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">Cholamandalam<\/a> etc have always kept this principle as a priority when taking strategic decisions. These NBFCs have always borrowed using long term debt instruments while negligible proportions of borrowing that relies on short term debt instruments to finance their projects which have a much shorter time horizon.<\/p>\n\n\n\n<p>This obsession with Asset Liability management (ALM) has rewarded them quite handsomely.\u00a0<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">Economic Environment<\/h4>\n\n\n\n<p>The pandemic had brought the global economy to its knees. To stave off recession, all major economies provided economic stimulus in one form or the other. The stimulus did do its job but in return, introduced inflationary pressures on the economy. Furthermore, the Ukraine &#8211; Russia conflict also brought its own problems. As the breadbasket of Europe turned into a war zone and economic sanctions on Russia made things even worse from an inflationary standpoint. Along with that, oil prices soared reflecting the current economic climate. All these factors combined, brought inflation to a higher than desired levels in many economies including India. RBI responded with increased interest rates with the hope of curbing inflation. <br>*To understand the global macroeconomic scenario better, check out this <a href=\"https:\/\/44.250.171.167\/the-recession-prophecy-indias-bottom-line\/\" target=\"_blank\" rel=\"noreferrer noopener\">report<\/a>.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\">The Zero Coupon Bond Trend<\/h4>\n\n\n\n<p>In the situation of high interest rates, domestic NBFCs kept the mantra of Asset Liability Management (ALM) in mind and pivoted to Zero Coupon Bonds to raise debt. The reason behind this trend is that with zero coupon bonds do not have to pay coupon payments at regular intervals. The <strong>absence of coupon payments in a high interest environment benefits NBFCs<\/strong>. Zero Coupons Bonds are given at a discount amount and at maturity, they are repaid at the principal amount. <strong>As an NBFC, to rely on a non-coupon paying long term debt instrument is an intelligent move keeping in mind their ALM agenda especially in a high interest rate environment.<\/strong> Additionally, zero coupon bonds take away the reinvestment risk for investors and gives the borrower more time to repay the loan.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>One of the most significant lessons in the Indian Banking literature is that firms should never borrow for a short term when their asset\u2019s cash has a long time horizon.&nbsp; Or to put it more simply, you don\u2019t buy your house with credit card debt. Thus, it is vital for firms to ensure that their [&hellip;]<\/p>\n","protected":false},"author":1885,"featured_media":133769,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1941,1,6352],"tags":[10382,10097,9708],"class_list":["post-133766","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-stock-analysis","category-finance-stocks","category-research-summary","tag-debt-raising","tag-financial-service","tag-nbfc"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"https:\/\/alphastreet.com\/india\/wp-content\/uploads\/2022\/09\/iStock-1301136169.jpg","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":154775,"url":"https:\/\/alphastreet.com\/india\/knr-constructions-paving-the-way-for-indias-infrastructure-development\/","url_meta":{"origin":133766,"position":0},"title":"KNR Constructions: Paving the Way for India&#8217;s Infrastructure Development.","author":"Divyansh_Kasana","date":"October 6, 2023","format":false,"excerpt":"Stock Data: TickerNSE: KNRCONExchangeNSEIndustryCONSTRUCTION Price Performance: Last 5 Days-1.29 %YTD+6.55 %Last 12 Months+21.83 %As on 06-10-2023 Company Description: KNR Constructions is a prominent player in the Indian infrastructure sector, specializing in road construction and development. Critical Success Factors: 1. Successful Concession Agreements: KNR Constructions has demonstrated its ability to secure\u2026","rel":"","context":"In &quot;Research Summary&quot;","block_context":{"text":"Research Summary","link":"https:\/\/alphastreet.com\/india\/category\/research-summary\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/10\/f6ceac66-f2a3-45a2-ae80-d4455cad9356-4.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/10\/f6ceac66-f2a3-45a2-ae80-d4455cad9356-4.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/10\/f6ceac66-f2a3-45a2-ae80-d4455cad9356-4.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/10\/f6ceac66-f2a3-45a2-ae80-d4455cad9356-4.png?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/10\/f6ceac66-f2a3-45a2-ae80-d4455cad9356-4.png?resize=1050%2C600&ssl=1 3x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/10\/f6ceac66-f2a3-45a2-ae80-d4455cad9356-4.png?resize=1400%2C800&ssl=1 4x"},"classes":[]},{"id":153614,"url":"https:\/\/alphastreet.com\/india\/il-5-rise-in-profits\/","url_meta":{"origin":133766,"position":1},"title":"IL&#038;FS Investment Managers Ltd Q1FY24; 5% rise in Profits","author":"Hardik Bhandare","date":"August 14, 2023","format":false,"excerpt":"Incorporated in 1987, IL&FS Investment Managers Limited is a domestic private equity fund management company which deals in investment banking, asset management and infrastructure financing. Financial Results: IL&FS Investment Managers Ltd reported Revenues for Q1FY24 of \u20b913.30 Crores down from \u20b917.02 Crore year on year, a fall of 21.86%. Total\u2026","rel":"","context":"In &quot;AlphaGraphs&quot;","block_context":{"text":"AlphaGraphs","link":"https:\/\/alphastreet.com\/india\/category\/infographics\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/08\/image-979.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/08\/image-979.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/08\/image-979.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/08\/image-979.png?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/08\/image-979.png?resize=1050%2C600&ssl=1 3x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/08\/image-979.png?resize=1400%2C800&ssl=1 4x"},"classes":[]},{"id":142475,"url":"https:\/\/alphastreet.com\/india\/earnings-summary-of-gr-infrastructure-limited-for-q3-fy23\/","url_meta":{"origin":133766,"position":2},"title":"Earnings Summary Of GR Infrastructure Limited For Q3 FY23","author":"Hardik Bhandare","date":"February 22, 2023","format":false,"excerpt":"G R Infraprojects Limited (NSE: GRINFRA) is an Indian infrastructure company engaged in the execution of various civil construction and infrastructure projects in India. The company operates in several segments including highways, bridges, flyovers, airport runways, and tunnels. The company was founded in 1995 and has since then grown to\u2026","rel":"","context":"In &quot;Earnings&quot;","block_context":{"text":"Earnings","link":"https:\/\/alphastreet.com\/india\/category\/earnings\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/02\/898c572d-b97a-4c10-acd3-c5f4d9ad88be-12-1.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/02\/898c572d-b97a-4c10-acd3-c5f4d9ad88be-12-1.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/02\/898c572d-b97a-4c10-acd3-c5f4d9ad88be-12-1.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/02\/898c572d-b97a-4c10-acd3-c5f4d9ad88be-12-1.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/02\/898c572d-b97a-4c10-acd3-c5f4d9ad88be-12-1.jpg?resize=1050%2C600&ssl=1 3x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2023\/02\/898c572d-b97a-4c10-acd3-c5f4d9ad88be-12-1.jpg?resize=1400%2C800&ssl=1 4x"},"classes":[]},{"id":178827,"url":"https:\/\/alphastreet.com\/india\/indias-2026-27-budget-proposes-banking-review-bond-market-measures-and-municipal-bond-incentives\/","url_meta":{"origin":133766,"position":3},"title":"India\u2019s 2026\u201327 budget proposes banking review, bond market measures and municipal bond incentives","author":"Staff Correspondent","date":"February 2, 2026","format":false,"excerpt":"India\u2019s federal budget for 2026\u201327 set out a series of measures for the financial sector, including a comprehensive review of the banking system, steps to deepen corporate and municipal bond markets, reforms for non-banking financial companies, and changes to foreign investment rules, Finance Minister Nirmala Sitharaman said in her budget\u2026","rel":"","context":"In &quot;Analysis&quot;","block_context":{"text":"Analysis","link":"https:\/\/alphastreet.com\/india\/category\/stock-analysis\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2026\/01\/Budget-2026_2.png?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":133654,"url":"https:\/\/alphastreet.com\/india\/will-adani-group-be-able-to-survive-after-witnessing-a-debt-to-equity-ratio-of-2021\/","url_meta":{"origin":133766,"position":4},"title":"Will Adani Group be able to survive after witnessing a Debt to Equity ratio of 2021%","author":"Chirag Gupta","date":"September 1, 2022","format":false,"excerpt":"On one humid Sunday morning, you sit on the balcony of your house, only to read a newspaper thinking what a lovely day it is! Oh! suddenly a news headline catches your attention -\u00a0 \u201cGautam Adani Now World's 3rd Richest, First Asian In Top 3\u201d. Now I am sure as\u2026","rel":"","context":"In &quot;Analysis&quot;","block_context":{"text":"Analysis","link":"https:\/\/alphastreet.com\/india\/category\/stock-analysis\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2022\/09\/adani3.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2022\/09\/adani3.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2022\/09\/adani3.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2022\/09\/adani3.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/alphastreet.com\/india\/wp-content\/uploads\/2022\/09\/adani3.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":143623,"url":"https:\/\/alphastreet.com\/india\/care-ratings-poised-for-growth-as-indian-credit-market-recovers\/","url_meta":{"origin":133766,"position":5},"title":"CARE Ratings Poised for Growth as Indian Credit Market Recovers","author":"Divyansh_Kasana","date":"April 11, 2023","format":false,"excerpt":"While the Indian economy has been recording healthy growth, there are concerns for the external sector. With the global economy slowing down, India\u2019s economy will definitely feel the pain. At this crucial juncture, the critical aspect would be for the domestic demand revival to be sustained. 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