Shriram Finance to raise Rs 400 crore from interest-cap bonds

22 Mar 2023 , 10:56 AM

Shriram Finance plans to raise Rs 400 crore through a first-of-its-kind bond structure from the Hong Kong and Shanghai Banking Corp Ltd (HSBC), which will allow the company to cap its liabilities in the event of an interest rate increase after one year while also benefiting from falling rates.

The bond has a 25-month term, with the company paying a fixed 8.95% interest rate for the first 13 months.

The bond will be linked to one-year overnight indexed swaps (OIS) for the remainder of the year, but the interest rate option purchased by the company will allow it to cap its interest above a certain level, which will be borne by the bank.

According to Mahesh Mathew, who oversees rates and global debt market trading, Shriram will pay an additional amount to limit the interest rates in case of unexpected escalation while availing the advantage of any potential decrease in interest rates during the latter half of the bond duration.

In addition to HSBC, several other institutional investors are involved in the agreement. However, the bank will be accountable for the interest rate risk above a specific threshold.

Mathew stated that the interest rate choice offered to Shriram Group was valued at an Overnight Index Swap (OIS) ranging from 6% to 6.50%. Following the initial 13 months, the interest rate will fluctuate at a spread of around 250 basis points higher than the OIS rate.

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