Bond St's best

Which was the best bond deal of 2002? It's difficult to single out any particular transaction. There were at least half-a-dozen that stood out for their unique structures and fine rates.

If one is forced to choose from Bond Street's best deals of the year, then the choices would be Grasim Industries' inverse floater and Power Finance Corporation's 20-year zero coupon bond. In fact, treasury managers are split vertically on which is the best.

Grasim Industries raised Rs 50 crore (Rs 500 million) in the first week of August through the "inverse floater". The coupon yield on this five-year instrument is inversely related to the general direction of interest rates.

That is, if the interest rates in the system decline, Grasim will pay an increased coupon and vice-versa. The Deutsche Bank and Union Bank of India and which had invested Rs 25 crore (Rs 250 million) each in the issue, were the arrangers and underwriters.

The coupon was fixed as the difference of 14 per cent and the one-year government bond yield, and is payable semi-annually. The one-year government bond yield at that time was 6 per cent (semi-annual).

Thus, the first-year coupon on the paper is 8 per cent (semi-annual). This instrument gave the investors a 40-basis-point mark-up over the prevailing yields.

The uniqueness of the deal was that it converged two opposite views on interest rates. In fact, this kind of instrument can be issued only if the issuing corporate and the investing banks hold opposite views on interest rates.

In this case, the banks felt that the interest rates would soften while the corporate felt that interest rates had more or less bottomed out.

It was a trend setter deal. A number of corporates floated similar instruments after Grasim.

On the other hand, Power Finance Corporation (PFC) early this month mopped up Rs 250 crore (Rs 2.5 billion) through a unique zero coupon bond of 20-year duration that does not have a put/call option.

It has too many 'first' to its credit. This is the longest ever corporate paper floated -- 20 year tenure without any put and call options.

This is a unique deal which has lengthened the maturity of Indian corporate papers and created a new benchmark.

And Reliance Industries Ltd created history of sorts by raising Rs 500 crore (Rs 5 billion) five-year money at 6.20 per cent, below the Reserve Bank of India's bank rate.

This is the first instance of an Indian company raising long-term money at below the bank rate.

Immediately after raising the money, the company entered into an interest rate swap with these banks to change its fixed rate liability to a floating rate liability, that is, from a fixed to a floating rupee-rupee swap. Citibank was the lead manager of the deal.

Treasury managers, however, feel that for all practical purposes, RIL has raised Rs 500 crore (Rs 5 billion) at Mifor. Since this is not an independent deal (the swap deal is the second leg of the transaction), they are not ready to accept it as the most unique deal of the year.

2002: The Year That Was

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