Housing and Urban Deve-lopment Corporation (Hudco) is embarking upon the book-building route in its purest form to raise Rs 500 crore due to the uncertainty in the interest rates in the debt market.
Many other corporates are also using this route to raise funds from the market.
Hudco is the only company which will not give any interest rate indication before raising the money. On the other hand, the coupon rate will be fixed after the book is built, unlike the other issues where the interest rate was indicated prior to the book-building exercise. For instance, IPCL had given an interest rate band prior to its recent book-building exercise.
In the case of Hudco, the book runner -- SBI Capital Markets -- will build the books and then decide the interest rate based purely on the response from the market.
In fact, the uncertainty over interest rates in the debt market has led highly rated corporates and public sector undertakings (PSUs) to follow the book-building process for determining the coupon rate of corporate paper. This way, they leave the rate determination entirely to the market. Hudco will enter the market through the book-building route on July 19 with its Rs 500-crore private placement plan, which has been rated 'AA' by Crisil. Earlier, IPCL had completed its Rs 300-crore issue through this route.
Leading merchant bankers, including SBI Capital Markets, ANZ Investment Bank and Birla Global Finance, have confirmed that other corporates, too, will be hitting the markets in the coming weeks using the book-building process.
These are mostly highly rated corporates which are concerned about the price and with issues sizes over Rs 150-200 crore looking at the most cost effective route, they said.
Following the cut in the Bank Rate, several corporates have shelved plans to raise money in the debt market. With uncertainty still prevailing, merchant bankers are suggesting the book-building route to corporates. However, the market has shown some resistance to the falling rates.
"The market is now considering the rate on government security as the benchmark. With the coming 10-year Government of India paper expected at 12.2 per cent to 12.5 per cent, there is resistance below these levels.
Rates are bottoming out with 'AAA' rated corporates raising money between 13.5 per cent and 14 per cent, AA+ at 14.25 per cent, AA corporates at 14.5 per cent, and 13.5 per cent for public sector undertakings and financial institutions," said a merchant banker.
As per the book-building procedure, investors indicate the amount they will invest at different coupon rates. Merchant bankers said this will enable the corporate to raise funds at lowest possible cost.
The Hudco issue has two components -- a tax-free component of Rs 100 crore and a taxable component of Rs 400 crore. The coupon rate on the tax-free component is expected below 10.5 per cent, while that of the taxable bond is likely to be around 12.5 per cent. The issue will have a tenure of 10 years, with put-and-call option after the first seven years. The minimum application size has been set at Rs 1 lakh. The taxable bonds also enjoy capital gains exemption under section 54EA and EB of the Income-Tax Act.
