Sharp fall in govt bonds triggers rise in tax-free issues

Tax-free bond issues languishing until last month, with prospective issuers getting jittery over success of their proposed issuances, have now got a new lease of life.

Sharp fall in government bond yields has triggered unexpected rise in subscriptions for tax-free bond offers that are open currently.

Government bond yields have fallen 20 basis points over the last one week with the benchmark 10-year bond yield trading around 7.90%, a level unseen since two years.

Merchant bankers said the unexpected fall in sovereign bond yields has given a spurt to subscriptions for tax-free bonds from both retail and institutional investors.

Since November, four PSU companies have launched tax-free bond issues. Barring Rural Electrification Corp that had the first mover advantage, bond issuances of Power Finance Corp (PFC)and India Infrastructure Finance Company (IIFCL) had seen tepid response.

PFC?s issue received a subscription of just R709 crore against a target mop-up of R4,950 crore.

?G-sec rates have fallen below 8%, so fixed coupon tradability has increased specially for AAA-rated papers,? Harsh Kumar Bhanwala, executive director of IIFCL.

IIFCL?s bond issue that was launched on December 26 had received lacklustre response at first but with just a day remaining to close, it has received R1,700 crore and merchant bankers expect record subscriptions on the last day as well. However, the subscriptions are still way below the target mop-up of R10,300 crore.

The issue concludes on Friday and Bhanwala said the final subscription could easily cross R2,000 crore. A company official said institutional investors such as banks are increasing their subscription to the bonds.

Merchant bankers said that interest from institutional investors has increased on hopes that the yields may fall further and therefore earn them good profits when they sell the bonds in the secondary market.

Retail investors, on other hand, want to lock in their investment as prospective tax-free bond issuances may be priced lower.

?Hudco is the last one being launched as of now. Any issue that comes hereafter will have a lower coupon rate as sovereign yields have fallen,? said a merchant banker associated with the Hudco issue.

Indian Railway Finance Corp is targeting to raise a whopping R8,900 crore through tax-free bonds and will likely launch its issue on January 21.

While increase in investor interest is not large enough to call tax-free bond issues a success, the spurt in subscriptions is indeed encouraging, merchant bankers said.