Investor appetite for tax-free bond issues by state-owned companies is making it tedious for private companies to attract money to their debt offerings. On Monday, public sector Rural Electrification Corporation (REC) closed its Rs 3,500 crore-tax-free issue, which was offering post-tax yields of up to 8.71%. Gold loan company Muthoot Finance, whose non-convertible debenture (NCD) issue also closed on the same day, too raised Rs 300 crore by offering 12.25%.
But, the difference is a significant portion of REC’s bond issue was lapped up by investors way in advance, while Muthoot just about managed to scrape through on the last day. Unlike an IPO, where most subscriptions come on the last day, public debt issues, where the allotment is typically done on the first-come-first serve, see subscriptions coming in right from day one. So, usually, the success of the issue is partly judged on the basis of the initial rush.
Distributors and analysts said attractive yields and risk aversion are prompting investors to choose tax-free bonds, which are essentially quasi-sovereign papers.
“Tax-free bond issues, which are quasi sovereign debt, are offering post-tax yield of up to 12.75%. So it's obvious that PSUs are finding more flavour than an NBFC or a gold loan company,” said Ashish Ghiya, managing director, Derivium Capital & Securities.
Srei Infrastructure, whose issue closes tomorrow and is offering 11.75%, has so far been able to raise only Rs 80 crore against its issue of Rs 200 crore (including green shoe option).
“The retail NCD issues are getting squeezed by the tax-free bond offerings. The overall credit environment is not good. Investors prefer best credit rather than marginally better rates. Rates in best credit like AAA are also up. Why one will take the credit risk,” said an investment banker, who didn't wish to be quoted.
The REC issue were rated AAA, while NCD issues, which are in the market, are rated AA or lower.
The next round of clash is between State-owned Hudco's Rs 4,800 issue and India Infoline Finance (IIFL)'s Rs 1,050 crore NCD issue, which are open for subscription tomorrow. The max coupon offered by the Hudco is 8.76% (tax-free), while IIFL is luring investors with 12.68% with an option of monthly payment.
Last year, the trend was a little contrast as tax-free bonds saw lukewarm response, while most NCDs were able to mop up desired funds. The coupon offered by tax-free bonds were sub-7.5%, while NCDs were offering around 12% to investors.
“Anything over 8% tax-free will do well. Structurally, the rates offered in India for retail saving (by post or bank FDs) is 8.5%. So people can related to that rate,” said Ghiya.
Another reason why NCDs are not finding much favour is that most of them are from NBFCs. "Bulk of NCDs issue are from NCDs. There are a lot of investors who have already invested in an NBFC paper," said Prithvi Haldea, MD, Prime Database.
