Largest Retail Bond Issue in Recent History Coming to Market
The Indian Infrastructure Finance Company (IIFCL) tax free bond issue which is coming to market shortly is set to become one of the largest ever bond issues open to retail participation in recent history.
Investment bankers believe that if the IIFCL bonds are priced correctly the issue may revive retail investor interest in the domestic bond market for the first time since 2003. Retail investors are not the only ones interested in how the deal prices with bankers saying there is keen interest in the issue from banks, insurers and state owned companies.
The issue has also sparked intense competition in the investment banking space for bragging rights to managing the deal, with up to 20 investment houses looking for a mandate to sell the tax free bonds. The bond issuance is part of the larger fiscal stimulus announced by the Central Government in order to try and keep the Indian economy growing at a torrid pace.
According to BNP Paribas Securities the first tranche of the issues Rs 10,000 crore or US$ 2 billion would come to market sometime this week. SS Kohli, chairman and managing director IIFCL said “We are yet to decide what part of the sum would be for the public issue (open to retail investors) and how much would be privately placed with large investors,”
Mr. Kohli declined to comment on the coupon rate and tenure of the deal, but investment bankers familiar with the bond issue say that the company will issue a 5 year instrument with an interest rate of between 6.5 to 7.5 per cent.
The yield on benchmark five-year corporate paper was currently at 8.45 per cent, with the spread between the five-year corporate and government bond in the range of 325 points according to data from Reuters.
Given the tax free status of the bond, investors say that an interest rate at the upper end of the range would make them an extremely attractive investment in an interest rate easing cycle. Public issue of bonds was a very popular fund raising technique at the start of the decade with financial institutions like IDBI and ICICI raising several thousands of crore or billions of dollars through zero coupon bonds. But with rates rising rapidly since 2003, bonds started falling in value and equity markets started outperforming which meant that the equity issuance for most of this decade has been the most fashionable method of financing.
IIFCL has been mandated by the Central Government to raise Rs 40,000 or US$ 8 billion through the issuance of tax free bonds. The cash raised will be used to find infrastructure projects such as highways, ports and power stations.
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