A Top India Lender Skips Call on Perpetual Bonds in Rare Move

Laborers prepare reinforcing steel on a commercial building construction site at dusk in the Lower Parel area of Mumbai. Photographer: Dhiraj Singh/Bloomberg

(Bloomberg) -- Indiabulls Housing Finance Ltd., one of India's leading mortgage lenders, decided not to redeem its rupee-denominated perpetual bonds as refinancing costs rise at the fastest pace in at least two decades.

The financier had issued the so-called hybrid notes, with characteristics of debt and equity, in June 2012 with an option to redeem them 10 years later. But the company chose not to call the 10.6% notes back on June 28 and instead paid interest on these securities a day earlier.

The unusual move may damp investors' appetite for perpetual debt. Any delay would make the bonds inherently less valuable because holders would have to wait longer to get the principal repaid. Investors around the world generally expect issuers to exercise the option, and a decision not to can cause shock in the market as was the case with Spanish lender Banco Santander SA in 2019. In India, National Insurance Co. decided not to exercise a call option on a bond in February.

Extending maturity risk has become a hot topic in credit markets globally, with companies unable to rely on low market yields to replace older hybrid bonds. Financing costs have surged locally too as the Reserve Bank of India joins other central banks worldwide in raising key interest rates to tame inflation.

“The implied cost of equity for non-bank lenders has increased in the last year owing to rising interest rates and capital outflows,” a spokesperson for the company said. “These perps are attractively priced for investors, and the company's cost will be higher currently if it were to replace this with equity.”

The average yield on top-rated rupee corporate bonds due in three years has climbed 148 basis points to 7.46% so far this quarter, according to data compiled by Bloomberg. That makes it the biggest surge in costs for a three-month period, according to data going back to March 2002.

Extension Risks Rise for India Lenders' Perpetuals: Credit React

Usually, the coupon rate on such debt securities is increased by at least 100 basis points if the issuer doesn't exercise the call option. But there will be no change in the case of Indiabulls Housing's issuance as the bond does not have this covenant. The spokesperson said that the company would consider redeeming at an opportune time as it is now focused on capitalizing strong demand for mortgages.

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