bond: REC bond yields larger than HDFC’s


Mumbai: Bonds of HDFC are yielding about 40 foundation factors decrease than excellent debt at government-owned Rural Electrification Company (REC), upending the maxim that sovereign-backed loans are safer than paper issued by private-sector debtors.

That is an unintended consequence of the proposed merger between REC and one other state-run entity Energy Finance Company (PFC), triggering arbitrage trades and distortion in market charges, a number of market sources advised ET.

The 10-year REC bonds are yielding 8.60-8.65 per cent, whereas comparable maturity HDFC debt securities are fetching 8.10-8.25 per cent, sellers stated.

“Particular person publicity limits are stretched for traders,” stated Vijay Sharma, head of fastened revenue, PNB GILT. “That is an unintended consequence of the PFC-REC merger. For the market members, this widening yield unfold is just not essentially a credit score name, however it’s extra because of publicity norms. That is for the primary time that each the government-backed firms are yielding larger than top-rated personal firm.” Insurers and pension funds have largely invested in bonds of REC and PFC. Each investor is remitted to be compliant with single group publicity limits.

For debt investments, mutual funds are supposed to speculate as much as 10 per cent of their complete property, which could possibly be prolonged by one other 2 per cent with particular person board approval.

If two teams merge, rapid offloading of securities is required to halve their publicity.

“The merger of two entities, each of which have excessive excellent bonds, has created an unanticipated drawback,” stated Shailendra Jhingan, MD, ICICI Securities Main Dealership. “The 2 entities are topic to group publicity limits, leading to limits being unavailable for additional issuance from traders.”

Whereas some current traders could be compelled to promote, arbitragers could be shopping for these bonds. They search to achieve from a large differential between REC/PFC and the likes of Nationwide Highways Authority of India (NHAI), Nationwide Financial institution for Agriculture and Rural Growth (NABARD), Indian Railways Finance Company (IRFC), the place bonds are yielding 7.75-7.85 per cent.

Usually, the yield hole between these two units of top-rated sovereign firms stays at 10-15 foundation factors as an alternative of 85-90 bps now.

“The merger between REC and PFC has apparently triggered considerations amongst a bit of traders who consider a ranking downgrade is probably going,” stated Vikram Dalal, managing director at Synergee Capital. “Investor danger notion has modified prior to now eight months.”

In March, PFC paid Rs 14,500 crore to the federal government to purchase out its stake in REC. The proposed merger course of is prone to scale back sovereign holdings within the mixed entity even because the fund outgo would improve total borrowing ranges.

Hypothesis is rife that it would take away authorities’s majority management, though nothing is finanlised but. REC/PFC secondary market yields are suggesting charges akin to AA+ rated bonds, stated a fund supervisor, citing altering investor danger notion throughout ranking grades. Furthermore, each entities issued authorities serviced bonds along with their yearly borrowings.


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