No FOMO,Although We Missed Investing in the NHIT NCD!

NHIT – National Highways Infrastructure Trusts came up with a public issue of Non- convertible debentures on the 18^th of October 2022. The issue was for Rs. 750 Crs with an additional green shoe (the amount company can retain additionally) of Rs. 750 Crs.  To get issue details you can click here.

A public issue of NCD means that the company wants to borrow from the market participants, meaning institutions like banks, Mutual funds, Pension funds, etc., and retail public.

At first look, the NCD issue seemed exciting. Apart from insurance policies, there are very few instruments with a tenor of 25 years.  On a deeper look though, we were shocked at the stupendous response the issue got.

It was oversubscribed 6.6 times, (meaning they collected over Rs 5000 Crs ) and closed within two days of the opening.

Why were we not enamoured by a long-term, AAA-rated issue with a decent yield of 8.05%?

NHIT is sponsored by NHAI (National Highway Authority ltd), the government entity authorised to build roads in our country.

NHIT is an infrastructure investment trust of NHAI. In simple words, NHAI owns and operates a lot of roads, and some of its assets are transferred to an entity like NHIT. Investors can invest in these via invits like NHIT and can participate in the revenues via debt or equity. And Government-owned entities can earn or monetise their assets.

You can learn more about Invits here.

NHIT will buy and own roads via a SPV (Special Purpose Vehicle, a legal entity), collect the tolls and spend on the upkeep and maintenance of the roads.As per its needs, to fund the assets, it will expand its capital or borrow. Over the years from the revenue and the surplus it  generates , it will reward the Invit (share) holders, and repay the debt principal and interest of its debtors. Infrastructure projects are long-term, hence the long tenure. Currently, they own 8 toll roads admeasuring 246 km. They plan to increase it to 1500 km.

The terms of the issue briefly were:

1. NCD tenor – 25 years
2. Min Appln – Rs.10,000
3. Rating – AAA by Care & Ind – Ra
4. Coupon – 7.9% paid half yearly. Yield works out to 8.05%
5. The NCD will get listed and can be traded. If the investor wants liquidity, can sell in the market.
6. Interest will be taxable

So what is our beef with the issue?

1. Although the NHAI is a fully owned government entity, NHIT is not. NHAI owns 16% of it and the rest is owned by the public led by financial institutions like Ontario & CPP Investment Board. So it’s misleading to think that it’s a sovereign asset.
2. Nonetheless it’s AAA rated as things stand now. But the financial history is short and NHIT may have to keep raising money to buy assets and its profitability will depend on its prudent management. So this NCD should be compared to other similar AAA-rated borrowers.
3. The most important negative is the peculiar way this NCD is structured. Which is as follows:

The NHIT NCDs have a face value of Rs 1000 each, broken up into three parts termed as STRPPs – Separately Transferable and Redeemable Principal Parts. STRRP A is worth Rs 300, STRRP B is worth Rs 300 and STRRP C is worth Rs 400.

The principal portion on each STRRP is proposed to be paid back to you in full, after the 8th, 13^th, and 18^th years respectively from the date of allotment.The individual STRRPs are not being redeemed at one go, they will be redeemed in installments of Rs 50 each from the 8^th year up to the 25^th year.

To reiterate, if you invest Rs. 1000, you will get your money back from the 8th year onwards in Installment of Rs. 50 per year.In the 13^th & 18^th years, you will get Rs.100 back.

In our opinion, getting the principal back piecemeal like this is not a good proposition,as small sums of money get frittered away. The interest paid will also reduce from the 8^th year onwards as the principal starts reducing. This beats the goal of a saver who wants regular predictable, payouts.

On the whole, although 7.9%  is a good rate of interest for an AAA-rated entity, it is not earth-shattering. To block money for 25 years with a fragmented piecemeal return of principal in a bond with questionable liquidity does not seem very wise.

Institutions may be mandated to invest in the infrastructure sector, so they may find it attractive. Retail has no such compulsions, hence our surprise at the fabulous response.