Rail bonds: LIC's hard bargain ensures good pricing

Financial powerhouse LIC has made a hard bargaining for its Rs 1.5 trillion investments in Railway bonds by ensuring a coupon rate above 10 basis points higher than 10-year benchmark government paper.
"We have just signed an agreement with the Railways to invest Rs 1.5 trillion in their 30-year bond over the next five years. We made a good bargain and priced the instrument at 10 basis points (bps) over the benchmark 10-year government bond on a fixed rate," a senior LIC official told PTI.
At present, 10-year benchmark government bond yield is 8.40 per cent. This means the state-run insurance behemoth will get a yield of 8.50 per cent if the proposed rail bonds were to be priced today.

The coupon is the percentage of return that an investor gets in absolute terms on his/her investment on bonds.
The benchmark bonds carry a fixed rate coupon and the pricing for LIC will also be on a fixed rate basis.
The Railway bonds are of 30-year tenor and will mature in 2045, while the nation's largest financial entity will invest Rs 30,000 crore per annum into this debt for five years.

The official said the pricing is good for them as there is no long-term quality paper available in the market at present and the coupon comes at a fixed rate. The Railways will issue the bond from next fiscal through 2020.

An analyst termed the pricing as "beneficial to the Corporation (LIC) as it carries a fixed rate coupon."
Earlier in the day, Railways managed its biggest ever funding after getting the insurance giant to invest Rs 1.5 trillion in its 30-year bonds.
The funds to be raised from these bonds will be used by the national transporter for developing various projects.
The investment would be made through bonds issued by various entities of the PSU such as Indian Railways Finance Corporation (IRFC) beginning next fiscal. There would be a 5-year moratorium on interest and loan repayment.
"LIC has taken the task of supporting the Railways... It is a commercial decision... LIC will invest Rs 1.5 trillion over a period of five years," Finance Minister Arun Jaitley said in New Delhi.

LIC and Rail Ministry signed an MoU in New Delhi to facilitate the investment. Railway Minister Suresh Prabhu termed the MoU as a "marriage" between two major organisations of the country that would be a "win-win situation" for both.
LIC will be subscribing to bonds worth Rs 30,000 crore on an average every year over the next five years, Chairman S K Roy said. About the expected returns, he earlier in the day said, "the rate is yet to be finalised. Since it is a commercial decision, it would be a win-win situation for both.