Non-detachable warrant to be instrumental to propel bond market

The non-existent bond market could get movement, if it is linked to stocks through non-detachable warrant.

"Stocks have been a key attraction in the domestic secondary market," said share market analyst Rabindra Bhattarai. "If listed companies can link stocks to bonds through non-detachable warrant, the bond market also could get movement," he said, adding that investors have to feel bonds to be as lucrative as stocks for a vibrant bond market.

The domestic bond market has remained non-existent since the beginning of trading at Nepal Stock Exchange (Nepse) some 19 years ago. The Nepse trading floor was opened on January 13, 1994.

The bond market could not see any trading at Nepse, though stocks have seen a rare bullish and bearish trend in the last two decades.

The Nepse currently has Rs 4.97 billion worth of bonds of some 13 institutions — 12 banks and one of Nepal Electricity Authority — listed at a face value of Rs 1,000 per unit but they are never traded at Nepse.

"The institutions should attach warrant — a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date — as a sweetener, allowing the issuer to pay lower interest rates while issuing bonds," Bhattarai added. "They can be used to enhance the yield of the bond, and make them more attractive to potential buyers."

Currently, banks that have tight liquidity — due to regulatory capital adequacy ratio (CAR) — have started issuing bonds to increase their lending capacity. However, the decreasing interest rates have made bonds less lucrative also to be sold let alone being traded at the secondary market.

"The corporate debentures should be attached with a sweetener like warrant," agreed a banker, who did not want to be named.

"But the regulatory authorities including Nepal Rastra Bank and Securities Board of Nepal including the Company Registrar must bring regulation that could make issue of non-detachable warrant possible," he said, adding that banks and financial institutions have started thinking of new instruments to make their bonds more lucrative as it is one of the best possible alternatives to help them expand their lending capacity.

"It could also help short-term fund mobilisation apart from increasing marketability of the bonds," the banker said, adding that the domestic banks did not issue warrants also — apart from regulation — due to their ability to manage capital to maintain CAR. "But recently most of them have started issuing bonds as they needed supplementary capital."

The capital market also might get depth as investors will get an alternative to shares, apart from companies, that will be able to mobilise capital at lower cost as it will be attractive even with less interest.

However, the warrant can be attached with corporate bonds only and not government bonds.

According to a report from Asian Development Bank (ADB), the bond market in Nepal is non-existent and a robust bond market that can match the financing requirements of huge infrastructure projects in Asia and the growing appetite for long-term assets among local pension and insurance companies is key.

What is warrant
KATHMANDU:In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date. Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary and have expiration dates. The word warrant simply means to "endow with the right", which is only slightly different from the meaning of option. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable, and can be sold independently of the bond or stock.

In the case of warrants issued with preferred stocks, stockholders may need to detach and sell the warrant before they can receive dividend payments. Thus, it is sometimes beneficial to detach and sell a warrant as soon as possible so the investor can earn dividends.Warrants are actively traded in some financial markets such as Deutsche Börse and Hong Kong^. In Hong Kong Stock Exchange, warrants accounted for 11.7 per cent of the turnover in the first quarter of 2009, just second to the callable bull/bear contract. -- From Wikipedia, the free encyclopedia