Masala Bond: Did KIIFB pay a heavy price?

HDFC issued masala bond 4 months back at 8.75 pc

KOCHI: After the masala bond, the moot question being debated by the financial services circles is whether Kerala Infrastructure Investment Fund Board (KIIFB) had to pay a heavy price to pull off the masala bond.

While the people in the government, including the chief minister, have been visibly euphoric about the ‘success’ of the first sub-sovereign masala bond in the country, also for its ‘firstness’,  there are many in the industry, who choose to be vehemently on the opposite side.

When KIIFB decides to pay 9.723 per cent as coupon to garner Rs2150 crore from the international markets, obviously the move has been on the one hand, to diversify the fund base, but on the other and more importantly, it has to be essentially with an eye on raising funds cheaper than the domestic market.

“But look at the scenario. KIIFB is paying through the nose when Kerala’s common man/woman parks his/her funds in banks and other financial institutions through different instruments at rates ranging from 6 per cent to about 9 per cent,” said  head of an NBFC requesting anonymity.

The attraction of masala bond by definition is that the Indian issuers can borrow at low interest rates from offshore markets as interest rates in developed countries are historically much lower than that prevalent in India.

Talking to, Dr Vijayakumar, chief investment strategist at Geojit Financial Services, observed that, had the state not crossed the limits of borrowing, it could have raised money through treasury deposits at much lower rates than that paid to international investors to raise funds through masala bond.

“Moreover, there is another hidden or undisclosed aspect called the issue expenses – as several high-profile banks and law firms are involved in the issue, that if added to the coupon, could take the price up to near 10 per cent,” Dr Vijayakumar said.

There are several other institutions including IFC, HDFC and a few other central government authorities that have gone the masala bond way to raise and diversify funding base for their entities, but none seems to have paid this high price for masala bond that traces its genesis to as recent as 2014.

The most recent example of masala bond issue was about four months back in November 2018, when HDFC raised Rs500 crore at a coupon rate of 8.75 per cent per annum, payable semi-annually for the tenor of 5 years and 1 day.

The same HDFC had issued five-year rupee-denominated bonds worth Rs1300 crore in November 2017 too, at coupon of 6.73 per cent.

Though not an exact comparison, the Central Government’s five year securities currently trade below 7 per cent and its ten-year paper yields at around 7.6 per cent.

Interestingly, the state governments, including Kerala, have been borrowing funds from the market via state development bonds (SDLs) at coupon rates in the range of 8 to 8.4 per cent (at least in the past more than a year), and that too, for tenures as high as 8 years, 10 years or 12 years.

Dr KM Abraham, the chief executive officer of KIIFB, has been frank about the pricing while exchanging his views on the last week’s issue. “The state has been raising funds from the domestic market at rates close to 10.25 per cent, and taking that into account, we have still saved about 50 basis points to 60bps on this deal,” Dr Abraham told over phone.

Moreover, as many other experts point out, raising funds is not about the pricing alone. “For an institution like KIIFB, entry into international financial market throws up a lot of opportunities on several aspects in the long run.”

But when all is said and done, Dr Vijayakumar insists to highlight the need for the state to put its house in order. “The time when avenues were exclusively available for states is now history after the GST regime being in place, meaning that the states can’t even visualize on ways to raise substantial extra revenues unilaterally,” reminds Dr Vijayakumar.

The graveness of the situation of the state, not the making of KIIFB at the least, is the fact that most of the funds raised at high prices are being invested in infrastructure projects that hardly stand to generate income, and this leaves the repayment a tall challenge before KIIFB.

The establishment of KIIFB itself has been to borrow beyond the limit prescribed for the states by the Financial Responsibility and Budget Management (FRBM) Act 2003.

It remains a fact that the Finance Minister Dr Thomas Isaac has budgeted funds from motor vehicle tax (MVT) and petroleum cess as a backstop in an eventuality. But, all assumptions need not remain fool-proof given the dynamic nature of things in today’s world.


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