Krishna Bhagya sets bond mart dovecotes aflutter

If you thought only the best-rated corporates can raise resources from the bond market at fine coupons, think again.

Krishna Bhagya Jala Nigam Ltd (KBJLN), a Karnataka government undertaking with a A+(SO) rating, has hit the debt mart to raise Rs 189 crore at a pricing which is only around 100 basis points higher than the coupon at which an AAA-rated corporate can garner resources.

What has taken the market by surprise is the fact that KBJNL's issue has been priced at 6.85 per cent for five years and 6.90 per cent for seven years. This works out to a spread of around 180 basis points and 166 basis points, respectively, over the corresponding maturity government papers.

In contrast, as per the Fixed Income Money Markets and Derivatives Association's (Fimmda) bond spread matrix, the spread over the five-year and seven-year gilts for an A+-rated paper is at 255 basis points and 256 basis points, respectively.

Fimmda's bond spread matrix is based on the assumption that an issuer is rated purely on a stand-alone basis (the issuer has no external agency supporting his debt servicing obligations). This being the case, the spreads will obviously increase in case of state-guaranteed papers.

Bankers point out that Sardar Sarovar Nigam Ltd, which is rated A-(SO), is seeking to raise Rs 500 crore by issuing bonds of 10 years maturity (with a five-year put/call option) at 8.25 per cent and the AP Transmission Corporation, which is rated A(SO), is looking to raise Rs 375 crore by issuing seven-year bonds (with a five-year put/call option) at 8.15 per cent and 10 year bonds (with seven-year put/call option) at 8.40 per cent.

They wonder how KBJNL, which is rated only a notch higher than AP Transco and SSNL, could manage such a fine pricing. Even Konkan Railway Corporation, rated AAA(SO), recently raised Rs 205 crore via three papers saw tight pricing "" five years at 5.63 per cent; seven years at 5.89 per cent; and 10 years at 6.09 per cent.

KBJNL's issue offers three options "" a 10-year paper with five-year put and seven-year call option offering 6.85 per cent; a seven-year paper with a five-year put/call option returning 6.70 per cent; and a 15-year paper with a seven-year put and 10 year call option at 6.90 per cent.