The challenge:

Historically M&M’s long-term debt financing instruments were with embedded put and call options. Given the interest volatility, these instruments hardly survived beyond ten years with a call or a put being triggered. Equity or hybrid debt like convertibles therefore was the only choice for long-term finance, equity capital, besides being dilutive was also a costly source of funding.

M&M knew that they could also issue debt in global financial markets; however, in the external market, loans were cheaper than bonds and given the Indian regulatory regime, it was a challenge to time overseas borrowings. Overseas loans also expose the company to foreign currency fluctuations.

M&M treasury’s desired solution was to issue a 50-year bond with an interest rate of 9.55% per annum with no put or call option. The challenges in conceptualising and launching the issue was the absence of a benchmark (no Government of India bonds beyond 30 years has been issued), arriving at the right yield and finding investors in a market which was unaccustomed to the risk of a 50 year bullet instrument. Above all, the M&M board needed to be sufficiently convinced that the deal was not taking on costly debt and unfavourable interest rate risk, particularly as the interest was expected to soften in years to come.

The solution:

For the credit rating agencies there was no precedence of rating an instrument/corporate for a period of 50 years. Provident Fund Trusts and pension funds were the identified class of investors who would be willing to take on M&M’s credit risk for such a long horizon.

As to ensuring the board was comfortable, Mr K Chandrasekar, Executive Vice President – Corporate Finance and Investor Relations at M&M explains, “Our Board was convinced scientifically that interest rate volatility beyond 15 years would not materially impact the bond pricing. Intense discussions with the agencies provided them with the necessary comfort after we cited the past performance and demonstrated the future potential.”

M&M is a rare issuer of bonds in the rupee market and its strong lineage and governance was leveraged to convince the investors to take on M&M’s credit risk for 50 years. Strategically, by keeping the instrument simple (plain vanilla with no put or call), there was commitment on both sides, from the investor and the issuer. Though this was a deviation from normal convention, it helped in developing long-term bonding.

Being a 50-year bond, it is an equity-like instrument (quasi-equity) though at a much lower post-tax rate (~6.3% per annum vs ~18% per annum).

Best practice and innovation:

This is certainly an unusual arrangement given the tenor involved which has set a precedence for future issues. “This product was a category creation and a benchmark in the NCD/debt market for subsequent issues. It created a new market instrument for that tenor,” says Mr K Chandrasekar. “With the introduction of such long-term instruments, Indian corporates can now tap the domestic markets for long-term funds. Earlier they only had the option to access global markets which also brought with it foreign exchange exposure.”

CRISIL (Indian affiliate of S&P) said, “this issue will be the first 50-year plain-vanilla rupee-denominated instrument by a domestic corporate. This is indicative of the increasing confidence of investors in corporate debt for the long-term prospects of the country.”