Eastern Bank eyes zero-coupon bonds to reduce short-term interest burden

Eastern Bank will issue zero-coupon bonds to raise Tk 8 billion, shifting from the previous floating-rate structure, to reduce short-term interest payment obligations.

In a filing on Thursday, the listed private commercial bank disclosed its decision.

Earlier this year, the board of directors of the bank decided to issue unsecured, non-convertible, fully redeemable, floating rate subordinated bonds worth Tk 8 billion, with a tenure of seven years, to strengthen the Tier-II capital of the bank.

But on Thursday, they decided to issue zero-coupon bonds instead.

This will reduce their short-term interest payment obligation. Zero-coupon bonds pay back nothing until maturity and so the bank will face less cash flow pressure in the short term.

This decision may also reduce the bank's interest payment burden. If market interest rates rise, floating rate bonds become more expensive to service. Switching to zero-coupon bonds will fix the interest rate and eliminate the risk of increased payments.

This also may give the lender tax advantage as zero-coupon bonds can sometimes be structured in a way that delays tax liabilities or improves reported financials.

Moreover, some institutional investors prefer long-term, discounted securities like zero-coupon bonds.

According to one high official of the bank, they want to make the bond more attractive to investors.

Currently, the market is offering around 13 per cent on subordinated bonds. The bank official claims EBL zero-coupon bonds will give back 16 per cent with tax benefits although the original coupon rate is 11 per cent.

"The market is very saturated now. We were not sure whether we would be able to sell bonds for the entire required fund of Tk 8 billion. But now we will make a better offer if the regulator permits. We are confident that individual big investors will like our offer," said the official requesting anonymity.

The bonds will be issued to strengthen the Tier-II capital of the bank under Basel-III. The issuance of the bond is subject to approval from the regulatory authorities concerned.

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