Mumbai: Gujarat State Petroleum Corp. Ltd is seeking to raise 1,000 crore by selling 60-year hybrid perpetual bonds after raising an equal amount through long-term bonds in September.

While there have not been too many instances of firms selling these securities, bankers see them gaining ground.

Apart from a long tenure, the instrument offers other advantages to the sellers. Hybrid perpetuals are treated as subordinate debt and qualify as quasi-equity. This helps firms lower their debt gearing. In the case of banks, it enhances their capital adequacy ratio, or the ratio of capital to risk-weighted assets, a measure of a bank’s financial strength.

Companies requiring long-term finance have been seeking to raise money through hybrid perpetuals. In the recent past, Tata Steel Ltd, Tata Power Co. Ltd and a few banks have raised money through this channel.

“Firms that want to borrow long-term money without leveraging their balance sheets prefer to issue these bonds," said Randhir Singh, head of financing at Deutsche Bank AG’s India unit. “Since these bonds are structured to get equity credit, the risk of a downgrade by rating agencies on account of additional debt is reduced."

Pure perpetual bonds—as opposed to hybrid perpetuals —typically do not have a maturity date and the bonds do not offer the benefits of a quasi-equity instrument. Such bonds pay returns in perpetuity. Reliance Industries Ltd and Ballarpur Industries Ltd have raised funds overseas selling such bonds.

Hybrid perpetuals, on the other hand, offer a call option, typically 10-12 years. IDBI Bank Ltd has raised 450 crore through this instrument and Indian Overseas Bank is readying a plan for raising 800 crore.

Nirav Dalal, managing director for debt capital markets at Yes Bank Ltd, said many firms across sectors were seeking to raise money through hybrid perpetual bonds, especially in the infrastructure space.

Insulation from downgrades is one of the main reasons for the popularity of hybrid perpetual bonds. “The quasi-equity nature of the instrument goes well with credit rating agencies," said Dalal.

Rating agencies perceive these bonds as a means of protection for credit ratings. “Higher equity credit accrued through issuance of hybrid perpetuals allows for greater loss absorption for other bondholders and the company," said Naresh Takkar, managing director of credit rating company Icra Ltd.

However, Takkar warned that higher equity credit in some cases may cause lower ratings for the hybrid perpetuals as the subscribers for these bonds provide protection to others.

Sandeep Bagla, executive vice-president at ICICI Securities Primary Dealership Ltd, also said reducing the debt gearing is the main objective of perpetual bonds as the benefit of a long tenure is usually not available due to the condition pertaining to call option.

If the issuer does not exercise the call option by buying back the bonds, interest rates are stepped up by about 2 percentage points. “The firms have to exercise the call options or else they will have to service a higher coupon in the long run," said Bagla.

There is not much incentive for retail investors in long-term bonds as they do not offer quick gains. Hybrid perpetuals are preferred by investors such as pension funds. Typically, such funds have long-term liabilities.

“Private wealth management clients show interest in these bonds as they offer higher coupon than vanilla bonds," said Singh of Deutsche Bank.