2nd round of tax-free bond issue set to flop

Five public sector infrastructure finance companies have floated their second tranche of tax-free bonds, but most people involved in the deal expect the issues to get lacklustre response from investors.

Company executives and merchant bankers said it will be hard to lure investors to buy the second issue as they have a lower coupon than the first issue.

Power Finance Corporation (PFC), India Infrastructure Finance Company (IIFCL), Indian Railway Finance Corporation (IRFC), Rural Electrification Corp (REC) and Housing and Urban Development Corp (Hudco) are looking to raise a total of up to R19,021 crore through their second issue.

In the first tranche, the same five companies had raised about R13,255 crore, out of the R32,150 crore they set out to raise.

The coupon rates on the latest issues are 6.86-7.08% and 7.02-7.19% for 10 years and 15 years, respectively. The ceiling in the coupon rate for an AAA rated issuer is fixed at 65 basis points below the reference G-Sec rate for the retail investor and 115 basis lower for others. G-Sec has fallen 20 basis points so far this year from about 8% to 7.8%.

The first tranche, issued between December 2012 and early February, 2013, had a coupon of 7.19-7.34% for 10 years and 7.36-7.51% for 15 years. Last fiscal, most companies were able to raise their target funds through the tax-free bonds issue as the coupon was 8.2% and 8.3% for 10 and 15 years' term, respectively.

"Interest rates have come down and the market is very tight. It would be very difficult to raise substantial funds. We are trying to raise whatever we can," said an executive of one of the issuers, who did not want to be named.

Merchant bankers said it will be difficult to attract qualified institutional investors this time around as most of the players who wanted to buy these bonds have done so in the first issue.

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