The successful conclusion of Indore Municipal Corporation’s green bond offer to raise funds for a solar project is an interesting development for India’s bond market. Though municipal corporations have tapped institutional and high-net-worth investors in the past, this was the first muni bond issue to seek retail participation and receive a good response. The ₹122-crore offer (with a green-shoe option for an equal amount) attracted applications worth ₹720 crore, with the retail portion over-subscribed by 5.7 times.

This shows that retail appetite does exist for high-yielding muni bonds with good credit ratings. But to conclude that the success of this small-sized offer is an inflection point for urban local bodies to transform into self-financing institutions by relying on public markets for their funding requirements, would be a stretch. While the Indore bond issue has raised ₹700-odd crore, HDFC wrapped up a bond issue of ₹25,000 crore at a lower coupon the same week. Compared to the corporate bond market which enables fund raising of about ₹5-lakh crore every year and Central and State government debt auctions that raise over ₹20-lakh crore, municipal corporations have managed to raise less than ₹6,000 crore cumulatively from bond markets since 1997.

Specific features of Indore’s green bond issue are likely to have ensured good retail response. One, with a coupon of 8.25 per cent (effective yield 8.4 per cent), these bonds offered significant spreads over yields of 7.3-7.6 per cent on Central and State government securities. Two, the structuring of these bonds with return of principal in instalments at the end of 3, 5, 7 and 9 years, compensates for the 9-year lock-in and poor secondary market liquidity that usually goes with such bonds. Three, Indore Municipal Corporation managed to earn good credit ratings of AA and AA plus for this offer. Usually, urban local bodies are perceived to carry high credit risks and struggle to secure investment grade ratings, given the lack of ROI visibility on their urban renewal projects, and opaque accounting practices. Own tax revenues typically account for only a third of their revenue receipts, making them heavily dependent on Central and State largesse to fund deficits. The earmarking of the proceeds of the offer for a specific end-use (a 60 MW captive solar project) and the 125 per cent security cover and escrow arrangement for debt servicing, likely provided comfort to rating agencies and investors .

For Indian muni bond issuers, the key to improving liquidity and garnering higher institutional interest lies in larger issue sizes. For this, more municipalities will need to demonstrate sustainable revenue streams, revenue surpluses and positive net worth, after adopting transparent accounting practices. All this requires fundamental reforms in the working and governance structure of municipalities. Perhaps, the Indore model of raising small sums through project-specific bond issuances, is the way forward for the muni bond market.  

comment COMMENT NOW