Navigating the corporate debenture surge

Thursday, 2 May 2024 00:00 - - {{hitsCtrl.values.hits}}

For those keeping an eye on corporate disclosures and understanding the dynamics of the interest rate market, it’s becoming clear that we’re entering a phase marked by a temporary cessation in new corporate debenture issuances, likely to be followed by a substantial wave of them. Companies will aim to optimally time the market to issue new debt while grappling with persistently high rates—a situation directly tied to ongoing Government negotiations over debt restructuring.

Furthermore, regarding BASEL 3 convertible debentures, there are added complexities such as the risk of capital raising by banks and potential severe write-downs in sectors currently under moratorium. These factors might deter investors from what was once considered a prime asset class. We might soon see a market overwhelmed by corporate debentures that it simply cannot absorb.

Questions must also be raised about the role of regulators and whether the process for regulatory and shareholder approval for debt issuance compels companies to issue all their instruments at once or allows for more staggered, effective stages.

This aspect of regulation could significantly impact how companies manage their debt issuance strategies. It’s worth noting that the corporate expectation of debentures being oversubscribed multiple times over upon issuance—and again on opening day—is unrealistic. Issuances that are more competitively priced might attract fewer subscribers but could also reduce the firm’s financing costs.

To manage this build-up effectively, it would be prudent for companies to announce their issuances early and keep them open until fully subscribed. Additionally, firms should consider keeping debenture issuance as a regular financing option, potentially opting for smaller, more frequent issuances with complex pay-out structures that the market could more readily accept.

The Colombo Stock Exchange (CSE) should enable retail clients to trade corporate debentures via online platforms. Broadening regulations on debt issuances could also empower corporations to navigate the interest rate environment more effectively.

D. Perera