Tax free bond issue by HUDCO

It is no secret that the interest rate cycle has peaked and with a slew of tax-free bonds coming in the market, HUDCO's tax-free bond issue seems like a good low risk debt investment option for retail investors.

Objects of the Issue

Housing and Urban Development Corporation Limited will open on January 9, 2013 a public issue of secured, redeemable, non-convertible debentures tax free bonds of face value of Rs. 1,000 totalling Rs.750 crore with an option to retain oversubscription up to the shelf limit of Rs. 5,000 crore.

There are two investment options ranging in maturity between ten and fifteen years and is offering a coupon rate of 7.34% and 7.51% with an additional 50 basis points for retail investors taking the coupon rate to 7.84% and 8.01% respectively. The minimum application is for five bonds (Rs. 5,000) and in multiples of 1 bond thereafter. 40% of the issue is reserved for the retail investor- applying for an amount less than ten lakh.

Even Non-Resident Indians (NRI) and Foreign Institutional Investors (FII) can participate in the issue. The issue closes on January 22, 2013.The funds raised by the issue will be used for various activities like lending, repaying existing debt servicing and for capital expenditure and working capital requirements. The bonds are even tradable in the secondary market.

Investment Rationale

It has been given an AA+ rating by CARE and India Ratings. REC, PFC and IIFL which came out with tax free bonds earlier in December offered rates between 7.69 and 7.88 for 10 and 15 year periods. However, the rating for these bonds was one notch higher at AAA. Government Securities yields (G-Sec) which are used as a benchmark for determining the coupon on tax-free bonds are expected to come down soon. So the forthcoming tax-free bonds are expected to come out at lower rates.

Analyst: Megha Saraf & Jwalit Vyas