PFC, REC dump issues on clamour for coupon

Written by Aftab Ahmed | Mumbai | Updated: Aug 21 2013, 10:44am hrs
Two public sector companies, Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), have cancelled private placement of their bond issues this week due to lack of interest from investors who were seeking higher coupon payments that the companies were unwilling to accept. However, even as the two firms were forced to withdraw their issues, companies willing to pay higher coupons are still able to raise money from the rupee bond market. Infrastructure Leasing & Financial Services (IL&FS) on Tuesday mopped up R300 crore through two- and three-year issues at 11.25% and 11%, respectively.

PFC was planning to raise as much as R1,500 crore through the private placement of tax- free bonds but lack of investor interest due to the lower-than-expected coupon forced the firm to cancel the issue on Tuesday, merchant banking sources said. PFCs issue size was R150 crore, with an option to retain up to R1,500 crore of orders.

The company was issuing these bonds in three tenures, 10 years, 15 years and 20 years. For the 15-year tenure they were offering a coupon of about 8.19%, 15-year tenure paper was being offered at 8.26% and 10-year paper was slightly lower than that, a merchant banker said

The government has allowed 13 public sector institutions to raise R48,000 crore through tax-free bonds in 2013-14 to meet their infrastructure investment needs and said that 30% of R48,000 crore can be raised through private placement. As part of this, PFC is allowed to raise R5,000 crore through tax-free bonds in the current fiscal.

In FY13, nine tax-free bond issuers had offered coupons of 6.86-7.08% and 7.02-7.19% for 10 years and 15 years. In FY12, five companies had offered tax-free bonds at 8.2% and 8.3% for 10-and 15-year terms, respectively.

Meanwhile, REC, which was planning to issue taxable three-year bonds to raise Rs 150 crore with an unspecified greenshoe option, was also forced to cancel its offering as investors sought coupon rates far higher than expected due to market volatility.

Investors were asking for 10.75% which the company thought was too high, according to sources.

A merchant banker said companies usually keep a large oversubscription option even though the tranche sizes are Rs 100 crore to Rs 00 crore. Typically, companies like REC are able to raise Rs 2,000 crore to Rs 3,000 crore through such issues. This is a golden opportunity for investors if they can buy in now and lock their investments at prevailing rates. But investors are in a dilemma as they were thinking yields will rise further, another banker said.

Separately, REC sought the Securities and Exchange Board of Indias approval on Tuesday to raise Rs 5,000 crore in tax-free bonds.

The prices of all domestic bonds are benchmarked to government securities where the yield has climbed about 150 basis points since July 15 to hover around the 9% mark. While taxable bonds are priced at a premium over G-Secs, tax-free bonds are priced at a discount over the prevailing G-Sec rates.