LIC focusses on take-out financing, offers 9-9.5% rates

First the Life Insurance Corporation of India (LIC) aimed for a 100 basis point increase in its average yields through secondary market operations.

With interest rates continuing to fall, the state life insurance company is now focusing on take-out financing to boost its average investment returns.

LIC's average investment yields have fallen by over 100 basis points in the last one year, from over 7.5 per cent in February 2003 to about 6.5 per cent currently on fresh investments.

LIC expects capital gains of Rs 3,500 crore to come by way of secondary market operations this fiscal. A large portion of this has already come by way of sale of its equity portfolio as the stock market index crossed the 6,000-mark early this year.

Corporates are recycling their old debts, taking advantage of the falling interest rate regime. LIC is taking advantage of these opportunities as it takes over old loans, offering attractive terms and conditions with the aim of improving its investment yields.

LIC has offered loans to power projects in Himachal Pradesh and one belonging to the JP Group at an interest rate of 9 per cent for a six year loan.

Over 95 per cent of the project has been completed, leaving almost no possibility of cost-overrun or non-completion of the project.

LIC chairman S B Mathur told Business Standard: "We are picking up infrastructure projects that are near completion. Take-out financing offers higher coupon rates than picking up corporate debt paper. At the same time, as these projects are near completion and inflows have started coming in, there is negligible project risk."

LIC is keen to offer longer tenure loans against which it offers more attractive terms as this helps take care of its future investment returns.

"Security is paramount for us and hence we look at projects which are near completion," said Mathur.

LIC's role in the proposed infrastructure fund will also be that of taking on loans during the last stretch of the project completion following its ability to offer long-term loans taking into account its need for long-term assets to match long-term liabilities.

Meanwhile, LIC has been active in the stock market, taking advantage of the rising equity prices by selling part of its stocks in bank shares, among others.

However, its ability to capitalise fully on the improved stock market conditions is limited as it also has the ability to bring down the stock market should it sell too much of its holdings.

The domestic market has limited number of players who have the appetite and ability to pick up large quantity of stocks.

"Companies often call us enquiring why we are selling their stocks," said an official looking after investments, adding the fact that the market is very clued onto LIC buying and selling in the market place.