As tax-free bonds flop, PSUs turn to private placements-FE

Unable to raise money through tax-free bonds, public sector entities are turning to private placements, hoping to raise close to R50,000 crore through corporate bonds. As a result, bond sales in the January-March quarter could cross R1 lakh crore, with insurance companies, banks and provident funds as buyers.

Retail and high net worth investors have shunned tax-free offerings thanks to unattractive yields. 

Merchant bankers said Indian Railway Finance Corporation (IRFC) has already started the process. “IRFC has been talking to large investors because they know tax-free bonds don’t have any takers,” said a merchant banker with a leading private bank. Rural Electrification Corporation (REC) fell short of its aim to raise R4,500 crore through tax-free bonds, attracting just R2,100 crore earlier this month. Power Finance Corporation (PFC), which launched its tax-free bond offer after REC, had to extend the closing date by a week till Thursday. PFC has received just around R670 crore worth of bids so far, a merchant banker said. 

Merchant bankers said the IIFCL offer that opened on Wednesday and the Hudco bonds expected in January, may fare even worse. 

Hudco can raise around Rs 10,000 crore while IIFCL is targetting Rs 9,200 crore. 

The last quarter of any financial year typically sees a surge in bond issuances as non-banking financial companies see higher demand for credit. PSUs also raise funds to meet working capital needs. 

The Union Budget 2012-13 had set a target of Rs 60,000 crore for PSUs to raise through tax-free bonds, out of which they have raised only about Rs 2,500 crore. The government lowered the target to Rs 53,500 crore in November. 

PSUs are regular and large issuers of bonds via private placement and typically account for at least a fifth of the issues. 

According to Prime Database, PFC was the second-biggest bond issuer during April-September, raising Rs 12,498 crore. With the expected supply of bonds, the spread between corporate bond yields and those on government bonds may widen, bankers said. 

“Till now, corporate bond yields had fallen and government bond yields were steady. But during January-March, corporate bond yields will rise,” said a merchant banker at another private bank. 

Yield on 10-year corporate bonds issued by a PSU is around 8.80-9.00% currently while that on the 10-year benchmark 8.15%, 2022 government bond has eased marginally to 8.11%, keeping the spread at around 70-80 basis points. 

This spread could widen to 90-100 bps in January-March considering the rise in the supply of bonds, bankers said.