ABLs ongoing TFC IPO raises an interesting query at a time when the government is also planning to issue term finance certificates to the tune of Rs 90 billion to resolve its circular debt problem. While the bank is offering a return of 85 basis points over benchmark Kibor for first five years and 130 bps plus KIBOR for the next, the government is reportedly planning to offer 175 bps plus 6-month Kibor.
This anomaly can be attributed to a) the amount planned to be raised by the government (Rs 90 bn) is much higher than Rs 3 billion sought by ABL and b) the maturity period of the governments TFC might be longer than the 10 years of ABLs. Nonetheless, 100 bps difference between 10 - 30 year government bonds does not make the yield curve steep enough to explain 40 bps lower rate offered by ABL over the proposed circular debt TFC, even if it is offered for 30 years.
This raises serious questions with regard to the credibility of our government, if proposed rates are true. Moreover, it exposes the inability of the government to attract financing at cheaper rates. It is pertinent to note that, earlier this year, Pepco has already issued a multibillion five-year bond at 175 bps over base rate.
A word on ABLs offering: Meanwhile, the public offering of ABLs TFC itself might be welcomed by fixed income mutual funds, DFIs and corporations given the dearth of good instruments in the market.
The company has already raised Rs 2.25 billion through private placement on the instrument from twenty funds and institutions, and plans to raise just Rs 750 million through the IPO. This, coupled with the fact that the transaction is underwritten by five strong financial institutions, demonstrates the likelihood that the IPO will be fully subscribed.
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