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Bids Double Offers on Tax-Exempt Debt on Rate Peak: India Credit

India’s individual investors, lured by yields at about the highest since 2008, offered to buy more than twice the amount of tax-exempt bonds sold by state-run companies as a central banker said interest rates have “peaked.”

National Highways Authority of India and Power Finance Corp. received 335 billion rupees ($6 billion) of bids from private investors for the 140 billion rupees being sold to finance government improvements, underwriters said. The notes yield as much as 8.3 percent, compared with the 7.55 percent that Indian Railways Finance Corp. offered in October, when it sold the nation’s first public issue of tax-free debt.

“The hope that we are now at the top of the rate cycle adds to investor interest and tax-free and tax-deductible bonds offer better implied yields,” S.J. Balesh, a Mumbai-based senior director at Infrastructure Development Finance Co., or IDFC, said in an interview on Jan. 3. “There is more retail interest because of the high yields offered.”

Investors want to lock in yields as Deputy Governor Subir Gokarn signaled yesterday that the Reserve Bank of India’s benchmark rate won’t rise from the current 8.5 percent. India’s repurchase rate compares with 0.25 percent in the U.S. and 1 percent in the euro zone after policy makers sacrificed growth last year to rein in price increases in a nation where the average person lives on less than $2 a day. The inflation focus meant that 10-year government bond yields rose 65 basis points in 2011 while the Sensitive Index of shares fell 25 percent.

Bond Bids

IDFC, based in Mumbai, plans to issue tax-deductible bonds “soon,” according to Balesh.

National Highways Authority, the road builder known as NHAI, got 245 billion rupees of bids for its 100-billion rupee debt issue that comprises 10- and 15-year maturities, G. Suresh, the company’s chief general manager for finance, said in an interview on Jan. 4.

Power Finance, which aims to raise 40 billion rupees from 10- and 15-year debt, has received bids for more than 90 billion rupees, according to Ashish Agarwal, executive director at A.K. Capital Services Ltd., one of the arrangers. Both the NHAI and Power Finance notes are rated AAA by Standard & Poor’s Indian unit, Crisil Ltd.

Rating, Returns

Indian Railway Finance Corp., the funding arm of the nation’s rail ministry, hired arrangers for a sale of tax-exempt bonds that may begin as soon as this month, according to a person with direct knowledge of the matter who declined to be identified because the terms weren’t set.

Trinath Behera, New Delhi-based general manager for bonds at Indian Railway Finance, said in an interview yesterday that a date for the issue hadn’t yet been decided.

The tax breaks on the bonds mean that investors may lock in returns of as much as 12 percent, 3.7 percentage points more than the yield on 10-year government debt, according to Mumbai-based Kotak Mahindra Bank Ltd., one of the arrangers of the NHAI issue.

“The bonds are also benefitting from their top rating, as they are issued by government-backed companies,” Paritosh Kashyap, a Mumbai-based executive vice president at Kotak Mahindra Bank, said in an interview on Jan. 4. The demand for the bonds shows that “the retail market is developing and investors are getting more educated about their investment options,” he said.

Economy Slows

Investors in the government debt market are betting that the central bank will cut borrowing costs in 2012 as the economy slows. Food prices fell 3.36 percent in the week ended Dec. 24 after increasing 0.42 percent the previous week, commerce ministry data showed yesterday. Industrial output shrank 5.1 percent in October from a year earlier, the first contraction since June 2009, government data showed last month.

The yield on the government’s benchmark 8.79 percent note due in November 2021 rose one basis point, or 0.01 percentage point, to 8.34 percent today, according to the central bank’s trading system. The yield has dropped 23 basis points this month.

The yield on 10-year bonds issued by top-rated Indian companies was 9.34 percent yesterday, after touching 9.8 percent in November, the highest level since 2008.

The difference in yields between Indian securities due in a decade and similar-maturity U.S. Treasuries has shrunk 9 basis points this month to 635 basis points. Rupee-denominated notes returned 6.7 percent in the past year, according to indexes compiled by HSBC Holdings Plc. Indonesian debt returned 19.2 percent, the most among Asian markets monitored by the lender.

No ‘Win-Win’

Allowing state-run companies to sell tax-free bonds isn’t a “win-win proposition” for the government, according to Mumbai-based A.K. Capital Services Ltd., one of the arrangers for the Power Finance sale.

“The bonds hurt the exchequer as the government is missing out on a heavy amount of taxes,” Ashish Agarwal, a New Delhi-based executive director at A.K. Capital, said in an interview on Jan. 4. This may make the finance ministry “circumspect” about allowing companies to sell more tax-free bonds in the financial year starting April, especially as the economy slows, he said.

The rupee advanced 0.4 percent to 52.7550 per dollar today after the RBI’s Gokarn said policy makers are “very concerned” about the currency’s 16 percent depreciation last year.

Default Swaps

The cost of protecting the debt of State Bank of India, considered a proxy for the nation, has surged to 393 basis points from 153 basis points a year earlier, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value for the underlying securities should a company fail to adhere to its debt agreements.

India’s benchmark Sensex stock index fell for a third day today, dropping 0.7 percent. The index’s slide last year was the worst since 2008.

Investor demand for tax-free bonds will continue to be “amazing,” according to Mumbai-based IDBI Federal Life Insurance Co. that oversees about $430 million.

“The yield is so attractive that eligible investors would not let go of this opportunity,” Aneesh Srivastava, the Mumbai-based chief investment officer at IDBI Federal, said yesterday.

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