Indian state-run firms delay zero-coupon bond sales on demand concerns, bankers say

By Dharamraj Dhutia

Three Indian state-run companies are likely to delay raising funds through deep-discount zero-coupon bonds as investor appetite has weakened, three merchant bankers said.

State-run Indian Railway Finance Corp IRFC, Housing and Urban Development Corp HUDCO and REC RECLTD were set to test the market but have been advised by their bankers to hold off, they said.

"We have advised companies to wait for at least two to three months, because under the current scenario, there is no appetite for these bonds," one of the bankers said.

The bankers requested anonymity as they are not authorised to speak to media. None of the companies replied to Reuters' emails seeking comment.

Deep-discount bonds are typically issued at a discount of over 20%-25% to their face value and do not pay interest.

Last Monday, Power Finance Corp was forced to withdraw its planned deep-discount bond issue for the second time in under six weeks due to weak demand.

"The recent pickup in yields and escalating geopolitical situation in the Middle East will further sway investors away from these instruments for the time being," said Umesh Khandelwal, chief business officer at bond arranger Tipsons Group.

Refinitiv benchmark AAA-rated 10-year corporate bond yield has risen nearly 20 basis points since the central bank changed its policy stance to "neutral" from "accommodative" on June 6.

Market participants have highlighted concerns of excess supply as the Indian government has approved issuance of such bonds worth 495 billion rupees ($5.6 billion) and more state-run companies are expected to get the go-ahead. The firms have to raise these funds by March 2027.

A lack of liquidity in the secondary market and losses faced by investors of an issuance by REC are also acting as deterrents, traders said.

In September 2024, REC raised 50 billion rupees through deep-discount bonds at a yield of 6.25%.

Companies that have received approval to issue deep-discount bonds:

($1 = 86.0400 Indian rupees)