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Banks may offer to buy some PSU debt from US-64 basket

C. Shivkumar

BANGALORE, July 6

A CLUTCH of banks have indicated their desire to pick up some of the public sector bonds in the Unit Scheme-64's portfolio of Unit Trust of India. The offer, mostly from public sector banks, is in a bid to infuse cash into the ailing scheme to meet redem ption obligations.

High-level banking sources said here that any such buyout of public sector bonds could be done at the prevailing yield-to-maturity (YTM). The PSU bonds in the US-64 portfolio include Mahanagar Telephone Nigam Ltd and National Thermal Power Corporation is sues made through private placements. The scheme also has some bond issues of financial institutions.

``We are prepared to pick up these securities since

this would be mutually beneficial,'' the sources said. Some of the public sector securities have high coupons compared to the new issues. The banks were looking for these categories of securities.

UTI, which had picked up these securities directly from the issuers at par, could make substantial profits by selling them to asset hunting banks now, given the current pricing in the markets. YTM-based pricing would mean that UTI would be getting a prem ium on their holdings. Currently, the YTM for top-rated PSU debt such as MTNL and NTPC with a residual maturity of five years is about 9.4 per cent. Most banks are aiming at the current yields of these bonds in view of their high coupon rates.

Most banks are also punting on the possibility of a further yield slide in view of the liquidity build-up in the banking system mainly through accretion of deposits and low demand for credit. If interest rates fall further, the banks would also stand to benefit through an appreciation in the value of debt securities.

The sources said that UTI, however, has so far not conveyed any intention to sell its PSU debt portfolios. Instead, what was being offered was repurchases (repos) with debt securities for raising short-term liquidity. This method is being adopted to rais e funds for restricted redemption option for the US-64 which was expected to open shortly, especially for the small investors.

The sources said that UTI was doing these repos for periods of 91 and 182 days. The rates being offered for these repos are about ten per cent.

UTI has substantial portfolios of State Government guaranteed securities. Banks have, however, said that none of them was interested in these securities. This is partly because few State Government guaranteed debt is rated and even fewer are listed in th e National Stock Exchange. Also, these securities are treated as illiquid, given the poor sentiment attached to State Government guarantees.

The sources said that some of the corporate debt, which had credit ratings below investment grade, also carried the same sentiment as the State Government securities. But banks' interest is confined to only the corporate debt which enjoyed high credit ra tings and consequently good liquidity, the sources added.

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