Goswami Infratech, an infrastructure company part of the Shapoorji Pallonji group, issued some high-yield bonds sometime mid-last year.
It wanted to revise certain terms because it couldn’t make an expected payment. The bond yield was high! 18.75% pa! For context, fixed deposit rates are around 7–8% right now.
Shapoorji Pallonji is a large 150-year old conglomerate. Why are they borrowing money at a rate comparable to that offered by those shady Chinese loan apps?
This is a typical case of a debt trap. For capital-intensive companies like those in the infrastructure sector, raising money via bond issues is an effective strategy, but it requires the business to operate smoothly to meet coupon payments. Any disruption in this cycle can impact the entire cash flow, as seen with the Shapoorji Pallonji group, making it difficult to recover. To manage cash flow and attract investors, ZCBs were issued at a deep discount.
Companies might raise new debt to pay off existing debt, but if things go wrong, they often end up approaching the NCLT. This scenario underscores an important financial lesson: never take on debt to repay other debt.
@amish that is true. But now the corporate governance has been better than before. Earlier it was easy to write off bonds (check the case of Yes Bank AT1). Even the RBI has permitted them to write off AT1s but still they can’t because retail investors were trapped (knowingly or unknowingly).
But, isn’t this standard operating procedure in the debt market when even the most reputed corporations periodically raise money using various bonds? With Asset–liability mismatch - Wikipedia being a constant risk that well-run corporations minimize and smart investors hedge against?
@cvs What i meant here was that, if corporations take debt to finance their business, its okay but taking another debt to repay an older debt should be avoided.
But, that is precisely how a lot of major corps are being run. (so, it sounds hard to view this aspect as a red-flag)
Looking at Debt IPOs (corporate bonds) of any major corporation,
whose new series are issued typically “just in time” to leave them with sufficient liquidity
to fulfill their principal repayment obligations upon imminent maturity of an older series of their bonds.
Here’s an example of a run-of-the-mill NBFC doing this a few years ago. (nothing special about this, just that i happened to be monitoring it)
