Liquid but risky

Reshma Krishnan

Recommendation:

Hotel Leela Venture: Avoid

Essar Oil: Avoid

Mangalore Refineries: Invest

THE trading activity in the corporate bond market was dry last fortnight and liquidity was seen mostly among a few default and deep-discount bonds. Among those that witnessed some liquidity were Hotel Leela Venture, Mangalore Refineries and Essar Oil.

Hotel Leela Venture

Hotel Leela issued a non-convertible debenture in February 1995 at a face value of Rs 150. The coupon was 14 per cent, payable semi-annually. The bond is to be redeemed in three installments of Rs 50 each in April 2001, 2002 and 2003 respectively. As is inherent with bonds that have low rating, the return is high and the yields may appeal only to investors with an appetite for high risk.

The debenture now trades below its issue price at Rs 146.50, thereby leading to a yield-to-maturity (YTM) of 20.39 per cent over the remaining life of the instrument. This is attractive even after taking into account the transaction cost. The debenture has made a steady rally in the last six months and gained around 20 per cent since mid-July 2000.

However, the credit quality of this company as of now is not that good. In this backdrop, only those with an appetite for high risk may invest in this option on the basis of the high returns. Otherwise, the bond is eminently avoidable.

Essar oil

Essar Oil issued this bond with a face value of Rs 105, for a coupon of 14 per cent payable semi-annually. The bond is to be redeemed in April 2003 at the face value of Rs 105. It now trades much lower then its issue price at Rs 53. This low price is probably because of the default rating.

On account of this low market price, the YTM at the current market price is high at 61.71 per cent. This may be because it is a default bond. This means that the obligation is either in default or expected to be so. The bond is liquid probably on speculative trading.

The bond traded between Rs 53 and Rs 60 in the last fortnight. Investing in it is highly risky and investors should avoid exposures as the company's operations are in a state of flux with the refinery project yet to take firm shape.

Mangalore Refineries

Mangalore Refinery and Petrochemicals Ltd (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 and became a non-convertible debenture (NCD). The bond is redeemable annually at par in four installments of Rs 19 each, starting 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 the interest is paid semi-annually.

The bond traded between Rs 38 and Rs 42 in the last fortnight and is fairly liquid compared to other such instruments. It now trades at Rs 39.20.

Its YTM calculated at current market price, stands at 13.60 per cent, without taking into account the transaction costs. This return is attractive at current price levels and investors can consider investing in the option.