L&T Finance Ltd has initiated a buy-back of its non-convertible debentures (NCD). This comes barely two months after Tata Capital Ltd cut interest rates on its NCDs and offered an exit option to all its NCD holders. But, unlike Tata Capital Ltd, the interest rates on L&T Finance NCD will remain the same. However, investors will be able to sell their NCDs back to the company if they wish so.
How would it work?
The buy-back option is a voluntary one and the firm has not made it mandatory for investors to opt for it. Beginning the month of June 2012, L&T Finance will open redemption or a repurchase window every month for a few days, wherein its NCD holders can submit their repurchase applications. For instance, the June 2012 window is already open; the last date for submission of redemption request is 8 June 2012.
“The buy-back offer will be available for the residual maturity of the respective bonds and will be open during the first 10 days of each month, subject to individual and quarterly limits. As of now, it is proposed to open this offer every month for the next 12 months,” said a senior official of L&T Finance in a reply to our emailed questionnaire.
As the buy-back option is on a continuous basis, there is a limited amount of NCDs that the company would accept. As per its offer document, the maximum amount of buy-back that the company will undertake, across all its options, will be 100 debentures per unitholder per quarter and up to 500,000 debentures in total, across all its series, per quarter, on a first-come, first-served basis.
Also See | At a glance (PDF)
The price of buy-back
Unlike Tata Capital NCDs that redeemed its NCDs at par, L&T Finance will redeem its NCDs at prevailing market rates. After accounting for the remaining tenor of all its NCDs, it will look at yields of similar maturing government securities (G-secs) and add a suitable mark-up in the yield and calculate its redemption price. Add to that the accrued interest (from the time it paid you the last interest amount till the time you held the NCDs before surrendering) and that is the price you’ll get in your hands.
L&T Finance has started its voluntary buy-back of its non-convertible debentures. So should you go for it? Mint’s KayezadAdajania gives us the lowdown.
Take for example, the N2 option that L&T issued as part of the series of NCDs it came out with in August 2009. This is a five-year option. As on 31 May, NCD holders of this option still have 27 months to go before its maturity date. In other words, the residual maturity for this option, as on 31 May, is about 27 months. L&T Finance will, therefore, look up the current yield of a 27-month G-sec and add a mark-up to that yield. Since yields of lower rated papers are typically higher than that of G-secs, L&T Finance will also price its scrip accordingly as its credit rating is AA+.
As per its “supplemental monthly offer document” for the month of June (it will issue this document every month on its website till the buy-back facility is made available), the value of, say, its N2 option is Rs 992.11. Add to that, the interest (as per what L&T Finance has mentioned in the same document) of Rs 19.45, the buy-back price for its N2 option has been arrived at Rs 1,011.56.
“The pricing seems to be fine as they are redeeming the bonds at current yields. To that extent, it is transparent,” says a fixed income fund manager, who did not want to be quoted because his firm does not allow comments to be passed on individual companies.
Should you go for it?
The good news in this buy-back programme is that the interest rates on existing NCDs are not getting lowered, unlike the Tata Capital NCDs.
However, what L&T has done is to open a new window for liquidity. Since volumes on BSE Ltd and the National Stock Exchange—the two stock exchanges where these NCDs are listed—are low, you can redeem directly with the firm if you need cash. “This is a good move by L&T Finance as it promises liquidity to investors and instills comfort in them that even though liquidity on stock exchanges is low, money will be made available. There is some kind of assurance,” says Ashvin Parekh, partner, national leader–global financial services, Ernst and Young.
Says Vikrant Mehta, head (fixed income), AIG Global Asset Management Co.: “From what I have read in L&T Finance Ltd’s master letter of offer and looking at the volumes of this NCD on the stock market, this buy-back programme has created a new window for liquidity. It’s positive. Also, if investors realize that here’s an NCD that also offers liquidity, it inspires confidence among future investors too.”
The buy-back option is not mandatory; it’s voluntary. Your decision to surrender your NCDs should depend on only one thing: do you need cash? Stay invested if you don’t need money and keep enjoying the yields that L&T Finance is earning for you. Says Suresh Sadagopan, a Mumbai-based financial planner: “In a falling interest rate scenario, these instruments would become more valuable in future. Since these NCDs are offering a fairly decent return, investors should stay put if they don’t need money.” In case you need money in future, keep checking its website, to know the specific month’s buy-back price, which L&T Finance has said will update once every month.
PDF by Shyamal Banerjee/Mint.