The Street hasn’t been too enthusiastic about the proposed 30-year bonds by infrastructure finance companies and infrastructure debt fund non-banking financial companies (NBFCs), as there is no clarity on rate cuts.
However, insurance companies and pension funds are game, as these entities aren’t involved in day-to-day bond trading and are interested in long-term papers. Last week, the government allowed infrastructure finance firms to issue secured debentures with tenures of up to 30 years. Infrastructure debt fund NBFCs, too, were allowed to issue secured debentures for up to 30 years.
Infrastructure projects have long gestation periods. As insurance and pension fund companies have resources for income streams across long periods, there is a match in terms of asset-liability.
Experts say companies with ‘AAA’ ratings, considered the safest in the bucket, will have an edge over those with lower credit ratings. “A period of 30 years is long and we cannot afford to take risks. Therefore, credit risk assessments in these cases will be more stringent to ensure their credit worthiness is up to the mark,” said Badrish Kulhalli, head of fixed income at HDFC Life. He added if infrastructure finance companies had been performing well, insurance companies such as his would opt for these bonds.
Amid expectations the quantum of tax-free bonds this financial year might be low, raising funds through this route will aid the infrastructure sector.
The chief investment officer (debt) of a mid-sized private life insurance company said since the company had long-term products in the traditional space, investing in 30-year bonds would be a good bet. He added with the insurance regulator’s push to investment in the infrastructure sector, this would aid the segment.
A few experts say if tax incentives are made a part of these investment products, these bonds might see more demand. “Some of the companies might be able to raise long-term funds from the market. But the appetite for long-term bonds depends on two factors — the overall direction of interest rates and tax incentives. If there are tax incentives on these bonds, there will be reasonably good demand from all sections of the investor base,” said Neeraj Gambhir, managing director and head of fixed income (India), Nomura Fixed Income Securities.
- The government allowed infrastructure finance companies to issue up to 30-year bonds
- Insurance and pension fund companies are game for it
- Clarity on direction of interest rates and tax incentives might result in larger investor base
- Preference will be for bonds of firms with highest credit rating