NDB Investment Bank Ltd. (NDBIB), demonstrating its commitment to introduce novel products to the market, is structuring the first-ever zero coupon debenture to be listed on the Colombo Stock Exchange.
This innovation was successfully introduced to the market through the recently-concluded rated unsecured subordinated redeemable debenture issue of National Development Bank PLC (NDB) amounting to Rs. 10 billion.
Commenting on the successful issuance of this pioneering instrument, NDBIB Chief Executive Officer Darshan Perera said: “We at NDBIB are committed to introduce new products to the capital market and the listed zero coupon debenture is yet another innovative security to the Colombo Bourse. The instrument was well received by the market and the entire quantum was quickly snapped up by provident funds, insurance funds and high net worth individuals.”
Zero coupon instruments do not carry periodic interest payments and are issued at a discount to the face value. The expected return to the investor is generated through capital gains. In the case of NDB debentures, the zero coupon instruments with face value of Rs. 100 were issued at a discount price of Rs. 63.8136 each, providing the investors an annual effective rate of 9.40% for a tenure of five years.
Commenting on the issuance of this zero coupon instrument, NDBIB Chief Operating Officer Kaushini Laksumanage said: “Zero coupon instruments offer benefits to both investors and issuers alike. In a plain vanilla debt instrument, investors need to reinvest the periodic interest receipts at the same interest rate offered initially in order to realise the original annual effective rate of the instrument. However, reinvestment returns depends on the prevailing interest rates at each point of reinvestment. As such, if the prevailing interest rates are lower than the rate offered initially, the investors face the risk of earning a lower annual effective rate on the investment. This risk is referred to as the ‘reinvestment risk’. Since zero coupon instruments do not carry periodic interest payments, holders of such Instruments are not exposed to any reinvestment risks. Further, zero coupon instruments are ideally suited for investors who require specific amount of income on a predetermined future date, as they can easily determine the exact quantum of funds that should be invested.”
Commenting further on the zero coupon instrument, Laksumanage said: “From the issuers’ point of view, zero coupon instruments will have no cash flow obligations until redemption, thereby enabling better cash flow management. Furthermore, zero coupon instruments enable issuers to minimise duration mismatches in their asset and liability portfolios. This can also be useful for investors such as provident and insurance funds and banks in order to achieve better management of assets and liabilities.”
NDBIB is confident that with its team of dedicated professionals, the company would be able to continue its quest for innovation in the future and maintain its market leadership position in the investment banking arena.
NDBIB is a fully-owned subsidiary of NDB Capital Holdings Ltd., which is in turn a 99.66%-owned subsidiary of National Development Bank PLC. In recognition of NDBIB’s services and contribution towards the Sri Lankan capital markets, NDBIB was adjudged the ‘Best Investment Bank in Sri Lanka’ for the third consecutive year at the Awards for Excellence 2014 by Euromoney, the world’s premier financial markets magazine and the ‘Best Investment Bank Sri Lanka 2014’ for the second consecutive year by International Finance Magazine and the World Finance Magazine.