Cash-rich miners PF mops up tier-II issues of banks

The provident fund (PF) has also invested over Rs 100 crore in the 10-year IDBI Bonds, which opened yesterday. IDBI Capital Market Services is the asset manager for the Coal Miners' PF.

Over 50 per cent of the Rs 1,000-odd crore received by Coal Miners' PF as interest on the special deposit scheme (SDS) has been invested in these issues at yields ranging between 5.80-6.30 per cent.

It may be pertinent to note that IDBI CMS was the lead arranger for the Tier-II issues of all the three banks.

BoB's Rs 300-crore Tier II issue was solely subscribed by the Coal Miners' PF at an yield of 5.85 per cent. This was a 10-year paper, rated AAA by Icra and Fitch.

When the paper was placed the yield differential between this paper and the corresponding maturity gilt was around 70 basis points.

The Coal Miners' PF also bought a significant portion of Canara Bank's Rs 420 crore 7 year 4 month paper carrying a coupon rate of 5.8 per cent. This paper has been rated AAA by Icra.

The PF also picked up a large portion of BoI's 10-year paper from the primary market, which carries a coupon rate of 5.88 per cent.

The PF has invested over Rs 100 crore in IDBI's Rs 500 crore redeemable non-convertible debentures. This issue has tenors of three, five years, seven years and 10 years and carries coupon rates of 5.90, 6.00, 6.20 and 6.30 per cent,respectively.

The Central Provident Fund Commission (CPFC), which received close to Rs 4,000 crore interest on its SDS portfolio, faces problems in investment as it needs to comply with various norms laid down by the asset manager "" State Bank of India (SBI). CPFC cannot invest in paper below AAA as the trust is risk averse.

Further, it refrains from buying more than five-year paper of non-PSUs, and considers most private sector paper to be unsafe.

PFs today are faced with a major dilemma as to where to invest the interest paid on the SDS by the centre.

All this while, the annual interest accumulated was ploughed back into the SDS at the prevailing interest rates. The government paid out interest at the rate of eight per cent.

Some PF trusts of nationalised banks have transferred securities from the bank's own portfolio to the trust as a means of managing the interest rate mismatch.

Other PF trusts are migrating to investment in secondary market paper and mutual funds, where yields range higher for longer term paper. Most new issuances in 2003 in the corporate debt market have a maturity profile of five to seven years.

Primary market issuances are priced lower than their previous issues in the falling interest rate regime. Hudco's primary issuance closed at 6.90 per cent and many PFs invested in the primary paper even as secondary market yields on Hudco's paper were higher at 7.15 per cent.