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Jan 04, 2013, 06.26 PM IST | Source: Moneycontrol.com

HUDCO tax free bond: Highest coupon, last opportunity

ICICIdirect.com has come out with its report on HUDCO Tax Free Bond. According to the research firm, the bond is a good investment option for a fixed income investor given its tax exempt status, higher coupon rate and issuance from a Mini Ratna government company.

ICICIdirect.com has come out with its report on HUDCO Tax Free Bond. According to the research firm, the bond is a good investment option for a fixed income investor given its tax exempt status, higher coupon rate and issuance from a Mini Ratna government company.

Housing and Urban Development Corporation Ltd (HUDCO) has come out with a tax free bond issue. This is the fourth tax free bond issuance after REC , PFC and IIFCL, which had come out with issues earlier in the current year. The HUDCO tax free bond comes with an annualised coupon of 7.84%and 8.01% to retail investors for tenure of 10 years and 15 years, respectively. G-Sec yields which are a benchmark for determining coupon on tax free bonds have corrected by 15-20bps in the last week. New bond issues will be coming at a lower coupon. Therefore, HUDCO tax free bonds provide the last opportunity to lock in higher rates.

Interest received on the bond is fully exempt from income tax. The pre-tax yield on the bond for the highest tax bracket investors, therefore, works out to 11.34% and 11.59% for 10 years and 15 years, respectively, higher than 8.5-9% on bank fixed deposit and other stable fixed income instruments. CARE and IRRPL have assigned AA+ rating for the bond issue, which is a notch below the highest AAA rating. The rating signifies a low credit risk. HUDCO is a wholly owned government company conferred with a Mini Ratna status. Increased focus of the government on the infrastructure space, going forward, may further augment government support and focus in development of HUDCO. Also, the secured nature of the bond makes them less risky making it a good fixed income investment option.

HUDCO tax free bond comes with a coupon rate of 7.84% and 8.01% for 10 years and 15 years, respectively, for a retail investor. It is the highest coupon rate offered so far, as it is rated AA+ as compared to AAA ratings of bonds issued earlier. However, there is no significant credit risk difference in the two ratings.

The coupon on the bond issued under the tax exempt clause is related to the prevailing government securities rates. The ceiling in the coupon rate for a AA rated issuer is fixed at 80 basis points (bps) below the reference G-sec rate* for the retail investor and 100 bps lower for others.It may be noted that the differential rate for retail investors shall be applicable only to original allottees. In the event of sale/transfer by the original allottee of the bond, the subsequent allottee will get the rates of other investor’s category. Hence, in order to get higher coupon it is advisable for a retail investor to subscribe to this new issue and hold till maturity.

The bonds will be listed on the National Stock Exchange. HUDCO Tax Free bond issued last year is currently trading at YTM of 7.61% and 7.47% for 10 years and 15 years, respectively. All other previous AAA 10 year tax free bonds are currently trading at 7.3-7.6% YTM and have earned 4-5% gains to existing investors. Given that interest rates are expected to decline there can be a similar capital appreciation possibility over the next six months to one year.

We believe the bond is a good investment option for a fixed income investor given its tax exempt status, higher coupon rate and issuance from a Mini Ratna government company.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click here

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