PFC, interest received on the bond is fully exempt from income tax. The pre-tax yield on the bond for the highest tax bracket investors, therefore, works out to 10.68% and 10.86% for 10 years and 15 years, respectively, higher than 8.5-9% on bank fixed deposit and other stable fixed income instruments. PFC is a government owned company and the NCDs issued are secured in nature, having priority over unsecured lenders. The issue is rated AAA by Crisil and Icra. Hence, the PFC tax free bond appears attractive vis-à-vis other fixed income instruments currently available for long term fixed income investments especially for highest tax bracket investors.
PFC Tranche II tax free bond has a coupon rate of 7.38% and 7.54% for 10 years and 15 years, respectively, for a retail investor and 6.88% for other category of investors, the highest permissible rate that can be offered. The coupon on bond issued under the tax exempt clause is related to the prevailing government securities rates. 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.
It may be noted that the differential rate for retail investors shall be applicable only to the original allottees. In the event of sale/transfer by the original allottee of bond, the subsequent allottee will get the rates of the other investor's category. Hence, in order to get higher coupon the retail investor has to subscribe in this new issue and hold till maturity.
The bonds will be listed on the Bombay Stock Exchange (BSE). The 10 year and 15 year PFC tax free bond issued last year are currently trading at a yield of around 7.33% and 7.44%, respectively. PFC Tranche I tax free bonds are currently trading at a yield of 7.31% and 7.43%. The Tranche II bonds with 50 bps higher coupon for retail investor are preferred over existing bond as it earns higher accrual. For retail investors, these bonds carry higher yield over most of the existing listed tax free bonds. All the previous 10 year tax free bonds issued last year are currently trading at 7.2-7.4% yield to maturity (YTM) and have provided gains of 5-6% in ~one year to existing investors.
PFC is engaged in financing and promotion of power generation, transmission and distribution including renewable energy projects throughout the country. State electricity boards are the primary borrowers. A lot has been talked about the bad health of the SEBs. However, PFC being a government owned organisation, investors may not be too concerned about the financial health of the company even if the default from the SEBs continues.
We believe the bonds can be looked upon by a retail fixed income investor given its tax exempt status, higher coupon rate and issuance from a government backed company.
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