Atleast 5 municipal bodies to issue bonds, interest rate cuts in the offing

MUMBAI: The bulking up of cash deposits in banks triggered by demonetisation has brightened the prospects of interest rate cuts and at least five municipal bodies of Pune, Ahmedabad, Rajkot, Indore and Bhubaneswar are likely to issue bonds after people ignored them for two decades citing weak financials.

These entities will raise up to Rs 10,000 crore collectively , a move aimed at building smart cities. Investors, too, can earn about half a percent higher than the usual state bonds. “Municipal bonds will offer new avenues for investors scouting for relatively higher rates amid falling rates,“ said Raj Kamal Bindal, head business development at ICRA Management Consulting Services, a company engaged with the government in the matter.

“Special Purpose Vehicles will do the whole gamut of activities on behalf of individual local bodies. Hence, investors need not to worry as SPVs are governed by Companies Act,“ he said. Since 1997, when muni-bonds (Municipal bonds), as they are known in market parlance, came into existence, only a handful of local bodies including Nashik and Visakhapatnam have tapped the debt market raising a few hundred crore.

The government’s smart city project has again revived it with many local bodies streamlining their financials aided by professional consultants.

Under the current scheme of things, Pune Municipal Corporation could well be the first local body to hit the market as it in the process of appointing investment bankers. “Municipal bonds may offer about 50 basis points higher than the usual state bonds, “ said Ajay Manglunia, executive VP (fixed income) at Edelweiss Finance. “The prospect of smart cities will help attract investors, who were earlier averse of betting on municipal corporations.” “Falling rates will definitely help lower borrowing costs for these local bodies, which would be a blessing for them,“ he said.

The benchmark bond yielded 6.27% on Wednesday. This month alone, it dipped more than 50 basis points pushing prices up.

Ulka Kalaskar, a senior official at Pune Municipal Corporation, said the local body may raise over Rs 2,000 crore in tranches although the exact amount is not yet finalised.

“We are in the process of getting a fresh rating from ICRA as we plan the bond sales,“ said Chetan Nandani, deputy municipal commissioner at Rajkot Municipal Corporation. “We have not defaulted on any bank loans so far. It is an opportune time to tap the market with falling yields.” Rajkot may raise anything between Rs 1,000 and Rs 2,000 crore. Better financials will help obtain greater rating grade. For example, PMC may have received AA (stable) from ICRA.

Credits ET Realty

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