Liquid bonds are in

Reshma Krishnan

THE LATEST credit-ratings for bonds were announced this week and there were few changes. The Gabriel India non-convertible debenture was downgraded to BBB-.

Though the market experienced little liquidity in the last fortnight, it saw a small rally in some bonds. Among them were those issued by Hindustan Development Corporation, IDBI and Mangalore Refineries.

Hindustan Development Corporation

This company issued a partially-convertible debenture (PCD) in January 1992. Its face value was Rs 50, redeemable in five equal installments commencing 1999. Two payments have already been made, leaving three of Rs 10 each, payable in March 2001, 2002 and 2003. The NCD had a coupon rate of 14 per cent, payable half-yearly.

The bond is rated default, which means the company has either defaulted in payments or is expected to. Therefore, investing in this bond carries a high element of risk. The bond now trades below its face-value of Rs 30 at Rs 23.25. The prices have been fluctuating at Rs 19-23.25 in the last two months and have steadily increased in the last five months. Though the yields on offer are high, this bond can be avoided by investors unless they have appetite for risk and are willing to be subject to the possibility of a default.

Mangalore Refinery and Petrochemicals

MRPL issued this partly-convertible bond in May 1992 at an issue price of Rs 135. After conversion, the bond had a face value of Rs 76. It is redeemable annually at par in four installments of Rs 19, beginning July 1999, with the final redemption in July 2002. The current face-value of the NCD is Rs 38. It has a high coupon rate of 16 per cent and interest is paid half-yearly. It has traded between Rs 41.70 and Rs 40.30 in the last fortnight and is fairly liquid compared to other bonds. It now trades at Rs 40.70.

The yield-to-maturity, calculated on the current market price, stands at 14.72 per cent. After accounting for transaction costs, the net return would be lower. This return is attractive at the current price levels and fresh exposures in this bond can be taken. The bond is also fairly liquid, and exiting this option will not be difficult.

IDBI

This deep-discount bond was issued in January 1992, which means that it was issued at a discount to its face value. In this case, the bond was issued for Rs 2,700. It now trades at Rs 9,900. It has a complex redemption scheme. There is a put option that entitles the investor to redeem the bond before the maturity date. This bond has a put option at the end of every five years from March 1992. The first option was in March 1997, when the bond would have been redeemed at Rs 5,700.

The next redeemable date is March 2002, when the bond is redeemable at Rs 12,000. The bonds can be redeemed in March 2007, 2012 and 2017 at Rs 25,000, Rs 50,000 and Rs 1,00,000 respectively.

If the bond is redeemed in 2002, the yield-to-maturity is 15.52 per cent. The 2007 option would realise a yield of 15.75 per cent; the 2012 option 14.13 per cent and the 2017 option 15.29 per cent. Few factors must be taken into consideration to see whether any of these options are viable. Apart from the YTM, there is the question of credit risk and maturity period.

The bond would be attractive even if the 2002 call option is used, which appears likely. After factoring-in transaction costs and a short maturity period, this bond yields an attractive return of about 15 per cent. The fact that it is also fairly liquid compared to other bonds, provides the investor with an exit option.