CRISIL has assigned its ‘CRISIL AAA/Stable’ rating to Larsen & Toubro Ltd’s (L&T’s) Rs.1-billion inflation-linked capital-indexed non-convertible debenture issue, the first of its kind in the country.
These debentures are unique as they offer inflation-adjusted returns to investors, based on movements in the wholesale price index (WPI) over the tenure of the instruments. While the real interest rate will be fixed, the instruments provide for annual indexation of the principal, leading to variable interest payout. At the end of the tenure, the redemption value will be the principal adjusted for the prevailing WPI, subject to a prescribed floor and cap.
Pawan Agrawal, Senior Director, CRISIL Ratings, said, “The introduction of such innovative instruments marks an important step in the development of the Indian debt market. Inflation-indexed debentures provide investors a hedge against inflation over a long term. This should lead to expansion of the investor base in the corporate bond market. For issuers, such instruments are akin to variable-rate loans, and in the near term, allow them to benefit from an expected reduction in the inflation rate.” Such innovative instruments also help issuers expand the range of their funding options.
Salient features of the instrument
· Tenure of 10 years with bullet redemption
· A real yield of 1.65% per annum
· The principal is adjusted with respect to the average WPI (released by the Government of India) over a trailing 12-month period, with a lag of 4 months.
· Indicative calculation of redemption value, at the time of maturity = (average WPI on redemption
· date/average WPI on issue date) * initial principal value; this is subject to a floor rate of 3% per annum and a cap rate of 12% per annum that is the principal at final redemption has a floor and a cap at 134% and 311%, respectively, of the original principal.
CRISIL has categorised this instrument as ‘complex’.