Budget 2012: Infra bonds may no longer be tax-deductible

Published on Sat, Mar 17, 2012 at 12:21 

Updated at Sat, Mar 17, 2012 at 16:32  

Article from Moneycontrol.com

Arnav Pandya

 

If you were celebrating about some small tax saving gains due to the announcements in the Union Budget then you actually need to stop and see whether you will actually end up with some benefits at the end of the day. While there was a lot of talk about the increase in the basic exemption limit what nobody would have told you is that one of the investment benefits consisting of the deduction from investing in long term infrastructure bonds is no longer present in the coming financial year.

Nature of benefit

Two years ago there was an additional deduction introduced to encourage investors to put money into infrastructure bonds. This consisted of bonds with a 5 year lock in and the maximum benefit for the year was restricted to Rs 20,000 of investments. The benefit was a deduction which meant that this amount of eligible investment was reduced from the taxable income of the individual. The tax benefit depended upon the slab that the individual fell into so this could vary. The most important part of the entire action was this was an additional benefit as compared to the Rs 1 lakh investment limit under Section 80C so it was something extra.

Devil in the detail

The manner in which this section was structured was that this was applicable initial for just one financial year and this was later extended for one more financial year which meant that the benefit was available for the financial year 2010-11 and 2011-12. Now there is no mention in either the explanatory statement to the budget or in the part of the budget that makes the changes to the income tax act about any change in this particular section. What this actually means is that the term of the section has not been extended and that it will end at the end of March 2012.

Implications

The implication of this is that the individual investor will lose the opportunity of this additional investment in the next financial year. This is a huge blow to them because this will actually push up their tax burden which will eat into the savings that they would have made due to the rise in the basic exemption limit. Take the case of a male person who has an income of Rs 6 lakh and they are using this benefit. The savings that they would have earlier got was Rs 2,000 on account of the rise in the basic exemption limit to Rs 2 lakh but a higher tax of Rs 4,000 due to the end of this benefit means that they are actually in a negative impact to the tune of Rs 2,000.

For those who are in the higher tax bracket the net impact will still be positive which is just due to the fact that the change in the tax slab has meant that there is an additional benefit that is available which is quite extensive. So for a male individual with a taxable income of Rs 12 lakh the net savings will be Rs 16,000.

Different

Investors should not confuse the increase in the permission given to institutions to raise additional amounts of tax free bonds with this particular benefit. Those are tax free bonds where the interest earned is not taxed while these are bonds that allow for deduction based upon the amount of investment in the bonds and the interest income earned here is taxable.

The author can be reached at arnavpandya@hotmail.com

Article from Moneycontrol.com

Bonds: Risk is back!

By Maureen Farrell @CNNMoneyMarkets March 14, 2012: 12:51 PM ET

Article from CNN Money

BlackRock: Get out of cash

NEW YORK (CNNMoney) -- The risky bond deals that were a hallmark of the pre-financial crisis boom are staging a comeback as investors continue to hunt for ways to find higher rates of return.

And companies are willing to meet the demand. Roughly $58 billion of high yield, or junk, bonds have been issued by 95 corporations since January. That's the fastest start in 15 years, according to Dealogic.

Investment grade bonds, which offer a lower, albeit more stable yield, have also continued to attract investor interest. Since January, about $150 billion of corporate bonds have been issued by 315 companies, according to Dealogic. While that's slightly faster than the past two years, it's well behind the pace set in 2007, 2008 and 2009.

But what's really captivating market watchers is the reemergence of a particular bond that has a so-called 'toggle pay-in-kind', or PIK, structure that allows a company sell new bonds rather than make semiannual payments to creditors.

Analysts and traders see these bonds as the first clear sign of a return to the pre-crisis era of financing.

Last week, Goldman Sachs' (GS, Fortune 500) private equity firm GS Capital Partners and Advent International issued $600 million in toggle PIK bonds with a 9.625% coupon to help finance their $3 billion buyout of TransUnion, the third-largest credit reporting company behind Experian and Equifax (EFX).

Meredith Whitney was right

The "toggle PIK" structure gives TransUnion the option to issue more debt instead of doling out $29 million in semiannual cash payments to debt holders.

"This deal got everyone's attention because it showed that there really is an appetite for these risky securities," said Richard Farley, a corporate partner at Paul Hastings.

TransUnion, Goldman Sachs, and Advent International declined to comment on why they chose this financing structure.

Because of the success of the TransUnion deal, several sources said deals with this type of financing are in the pipeline and could be announced in the next several weeks.

In theory, this structure should give a company like TransUnion more options should it run into trouble. If it sees a decrease in cash flow for a few quarters, it can issue more bonds and conserve cash.

In practice, however, companies with toggle PIK bonds have been more likely to wind up in bankruptcy. Between 2006 and 2010, companies with toggle PIK bonds defaulted at nearly twice the rate of companies with similar amounts of debt, according to Moody's.

My panicked trade

One trader called the reemergence of the toggle PIK bonds the first sign of "financial promiscuity" coming back to the bond market.

Farley says the PIK bonds and several other trends he's seeing in the high-yield market are functions of a hot market where investors are aggressively seeking yield again.

Among other signs of an aggressive lending market is talk of more high-yield deals that contain few covenants, or ways for bondholders to force companies to take certain actions.

Meanwhile, private equity firms are also issuing more debt to give themselves dividend payments.

One of the more high profile recent deals is Chicago private equity firm GTCR's marketing of a new $545 million loan for Protection One, a home alarm system company that GTCR bought for $828 million in late 2010.

The loan is expected to give GTCR a healthy cash dividend. Protection One and GTCR did not immediately respond to requests for comment.

Should this trend continue, industry watchers say private equity firms will continue to add debt to their companies to reap the dividend rewards.  

Article from CNN Money

Greek Bond Swap is Just Another Temporary Solution

Article from Nasdaq

Greece is set to swap its privately-held government bonds today for new ones that will represent a three-quarters loss of the original investment. The deal will allow the country to receive 130 billion euros in funds from its second bailout. Like the money from the first bailout, those funds will eventually run out however. 

The Greek bond swap is the biggest debt writedown in history. Over 85% of private investors (essentially banks, the deal does not include bonds held by the IMF or ECB) holding 117 billion euros ($234 billion) agreed to the 'voluntary' exchange. The CEO of one major European bank described the transaction as about as voluntary as a confession during the Spanish Inquisition. The loss to bondholders is twofold consisting of a reduction in face value of 53.5% and then lower interest payments stretched over a longer period of time. All in all, private bondholders are taking an approximately 74% hit (assuming of course there isn't another writedown or Greece doesn't renounce its debt completely in the future).

Credit rating agency Moody's decided to call a spade a spade and declared Greece to be in default. Moody's line of reasoning in stating the obvious is that it considers a loss greater than 70% to be a 'distressed exchange' (that's putting it mildly) and is therefore indicative of a default. The matter is not merely academic, since there is a significant amount of credit default swaps (bond insurance) outstanding on Greek debt. On Friday, a committee of the International Swaps and Derivatives Association the regulatory authority on credit default swaps ruled that the Greek debt restructuring was a credit event, and this will trigger payouts. How much CDS holders will receive remains to be seen.

Commentary from the EU political leadership on the swap deal was more mixed than after the first Greek bailout (statements back then were upbeat and generally confident that the problem had been solved and Greece was on its way to recovery). French president Sarkozy stated, 'Today the problem is solved. A page in the financial crisis is turning.' Christine Lagarde, head of the IMF said, 'The real risk of a crisis, of an acute crisis, has been, for the moment, removed.' German officials were far more cautious however. The French may be correct as long as their words are taken literally. The problem is indeed solved for today. That doesn't mean it is solved for tomorrow.

It is actually highly unlikely that the situation in Greece will be turning around any time soon because of the massive reduction in its debt load from the bond swap. If Greece had a functioning economy, there would be hope. However Greece's economy is heavily dependent on government spending and in exchange for bailout money the IMF and ECB have demanded severe cuts in Greece's budget deficits. Greece is now entering its fifth year of recession, after GDP contracted by 7.5% in 2011. Investment fell by 21% last year after sliding 15% in 2010. For Greece to continue to operate at all, continued bailout money will be needed. Greece has effectively gone from a welfare state to a state on welfare.

Not surprisingly, some analysts are sounding a note of caution. Predictions are that the financial bleeding in Greece will show up once again later this year. Problems may arise even sooner depending on when the next election takes place (now supposedly in May) and how much power the fringe parties gain. The bond market doesn't seem hopeful either. One year Greek government bond yields were last at 1143%. Such yields represent collapse, not solvency.

Daryl Montgomery is Author: 'Inflation Investing - A Guide for the 2010s'  Organizer,  New York Investing Meetup .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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