KIIFB to go ahead with masala bond issue

Undeterred by the political controversy over the floating of masala bonds, the Kerala Infrastructure Investment Fund Board (KIIFB) has resolved to seriously pursue and leverage maximum gains garnered by its debut entry into the international debt market.

Finance Department sources told The Hindu here that KIIFB could ill-afford to eschew the process that it had painstakingly completed under legal scrutiny at this point fearing political flak and would have to do more transactions by issuing domestic bonds and external masala bonds.

Doubts have been raised about the rates at which the bonds have been floated but KIIFB (and by proxy the State) was rated ‘BB’, which is four levels below the ‘AAA’ rating accorded to others in the masala bond market.

Once the rating goes down from the ‘AAA’ level, the bidder stands to lose 0.5% interest by every point and even by that thumb rule, KIIFB has managed to get 9.723% which is quite reasonable, the sources said.

Bid in domestic market

The lowest bid that KIIFB got from the domestic market was 10.25% and going by that scale, the present one was more advantageous.

Moreover, loans at much more affordable rates fall within the framework of the Fiscal Responsibility and Budget Management Act.

That means the upper borrowing limit for the State will be capped at 3% of the State Gross Domestic Product and that will not be adequate enough to meet the pressing demand to raise more funds for the infrastructure development endeavours taken up by KIIFB.

The dollar-bond exchange rate too is fraught with a series of problems and the rates are not competitive.

The State will have to purchase an additional hedge, an investment to reduce the risk of adverse price movements in an asset.

And, finally, it may work out to about 10%, which is higher than the rate for masala bonds floated recently.

The discussions preceding the floating of bonds were held between KIIFB personnel and a team of the company in question, Caisse de depot et placement du Quebec (CDPQ) led by Eric Lemieux, director of investment of external portfolio management and public market, from February 25 to 28 and not SNC Lavlin director Eric Siegel, the sources said.

KIIFB chief executive K.M. Abraham said such controversies would mar the prospects of the State from going ahead with its much-needed resource mopping endeavours to fund development projects.


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