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Investor appetite for tax-free bond issues by state-owned companies is making it a problem 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, offering post-tax yields up to 8.71 per cent. Gold loan company Muthoot Finance, whose non-convertible debenture (NCD) issue closed the same day, raised Rs 300 crore by offering 12.25 per cent.
The difference is a significant portion of REC’s bond issue was lapped by investors way in advance, while Muthoot just managed to scrape through on the last day. Unlike an Initial Public Offer (IPO), where most subscriptions come on the final day, public debt issues, where the allotment is typically done on a first come, first serve basis, see subscriptions from day one. So, usually, the success of the issue is partly judged on the basis of the initial rush.
“Tax-free bond issues, which are quasi sovereign debt, are offering post-tax yield of up to 12.75 per cent. So, it's obvious that public sector units are finding more flavour than a non-bank finance company (NBFC) or a gold loan company,” said Ashish Ghiya, managing director, Derivium Capital & Securities.
SREI Infrastructure, whose issue closes on Tuesday and is offering 11.75 per cent, has so far been able to raise only Rs 80 crore against its issue of Rs 200 crore (including an over-allotment 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 will one take the credit risk?” said an investment banker, who didn't wish to be named.
The REC issue was rated AAA; the NCD issues in the market are rated AA or lower.
The next round of clash is between state-owned Housing and Urban Development Corproation’s Rs 4,800 crore issue and India Infoline Finance (IIFL)'s Rs 1,050 crore NCD issue, open for subscription on Tuesday.
Hudco offers 8.76 per cent tax-free, while IIFL is luring investors with 12.68 per cent and an option for monthly payment.
Last year, tax-free bonds saw lukewarm response, while most NCDs were able to mop up the desired funds. The coupon offered by tax-free bonds were below 7.5 per cent, while NCDs were offering around 12 per cent to investors.
“Anything over eight per cent tax-free will do well. Structurally, the rates offered in India for retail saving (by post or bank fixed deposits) is 8.5 per cent. So, people can relate to that rate,” said Ghiya.
Another reason why NCDs are not finding much favour is that most of them are from NBFCs. "The bulk of NCD issues are from NCDs. There are a lot of investors who have already invested in an NBFC paper," said Prithvi Haldea, managing director, Prime Database.
