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Investors Sell `Old' Tax-Free Bonds to Put Money in New

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New issues likely to offer 7.25-7.5%, against 6.85-7.1% yield on old bonds
Many investors are keeping their gunpowder dry these days by selling their taxfree bond units subscribed in 2012-2014. These investors are gearing up for the large taxfree bond issuances from National Highways Authority of India (NHAI) and Indian Railway Finance Corporation (IRFC) totaling around ` . 16,500 crore that are likely to hit the market in mid-December.
These bonds are likely to be offered at higher yields than the existing ones that are traded on the bourses. These investors -both high networth and retail -will use the cash generated from the sale to apply for the forthcoming issues. The new tax-free bonds are likely to offer investors anywhere between 7.25 and 7.5%, while yields on old tax-free bonds are around 6.85-7.1%. The arbitrage will help investors make about 50 basis points.
For example, the 8.3% NHAI bond issued in 2012 and maturing in January 2027, trades at Rs.1,119 in the secondary market,thereby offering a yield of only 6.9%. Investors holding these bonds, can sell them and in turn subscribe to the new issuance of NHAI expected in December with yields in the range of 7.25-7.45%. Similarly the 7.22% REC bonds trade at Rs.1,017, giving investors a yield ` of 6.88%. Many such tax-free bonds issue by NHAI, PFC, REC, HUDCO in the financial years 2012-2014 are now exchanging hands in the secondary markets.
Distributors believe that this action by investors is catching pace now because of the huge issue size from NHAI and RFC. Earlier, tax-free bond issues of NTPC, PFC and REC in his financial year were small and investors could not get heir full share of allotment.Due to huge oversubscription, nvestors got allotment of a mere 15-20% of the amount hey applied for.
“Since NHAI and IRFC are huge issues, the probability of nvestors getting full allotment is high,“ says Vikram Da al, managing director, Synergee Capital. He suggests nvestors sell their old series of bonds, especially those with small issue sizes and apply for he forthcoming issues hrough primary markets, to benefit from the higher yields.Also the large issue sizes would offer higher liquidity in he future.
The Economic Times, New Delhi, 24th Nov. 2015

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