The better of the pack

Reshma Krishnan

THE INHERENTLY illiquid market did not improve.

Prices were range-bound with a few downward slides. Among those that saw some liquidity in relative terms were the bonds issued by the ICICI, Tata Steel and Hotel Leela Venture.

ICICI

ICICI issued a deep discount bond in January 1996. A deep discount or a zero coupon bond is issued at a discount to its face value and, on redemption, the investor gets the face value.

The debenture was issued at Rs 5,000 and now trades at Rs 9,251 after touching a yearly high of Rs 9,750 in the last fortnight. It will be redeemed in September 2023 at a face value of Rs 3,00,000.

If the bond is purchased at the current price of Rs 9,251, the yield-to-maturity is 20.12 per cent. Even after taking into consideration the taxes payable on the income, and the inflation and transaction costs, it is attractive. It is risky holding the bond for that length of time, despite ICICI's high credit rating.

The bond has been trading in the Rs 8,500-9,750 range. It is, however, not very liquid and, therefore, trading in it might be difficult at times. It would be worthwhile to hold the bond to maturity if one is comfortable with the risks involved.

Tata Steel

In November 1996, Tata Steel allotted regular income bonds at a face value of Rs 5,000 each. They had a coupon of 16.75 per cent, payable in March and September. The principal would be redeemed in four instalments of Rs 1,250 each at the end of the seventh, eighth, ninth and tenth years.

The bond has call and put options, allowing either the issuer or the holder to redeem it early. In this case, there is an early redemption scheme, when the principal can be redeemed at the end of the fifth year from the date of allotment which would be November 2001.

Considering the interest rate situation, the likelihood of Tata Steel exercising the call option is high. The bond was issued at a time (1996) when the interest rates were high. Now, an interest rate of 16.75 per cent is not feasible for any organisation.

The YTM is an unattractive 6 per cent. Therefore, on the risk of the bond being called next year, investors can avoid this option. Existing investors can look at liquidating their exposures.

Hotel Leela Venture

Hotel Leela issued a non-convertible debenture in February 1995 at a face value of Rs 150. It has a coupon rate of 14 per cent that is payable semi-annually. The bond will be redeemed in three instalments of Rs 50, in April 2001, 2002 and 2003 respectively. As is inherent with bonds that have low ratings, the return is high and may appeal to speculators.

The debenture trades below its issue price at Rs 138, thereby leading to a YTM of 23.45 per cent over the remaining life of the instrument. This is attractive even after taking into account the transaction cost. The debenture witnessed a steady rally the last couple of months and gained around 10 per cent since August.

However, the credit quality of this company is not that good. In this backdrop, investors with an appetite for risk might invest in this option on the basis of the high return.