The Infrastructure Leasing and Financial Services Ltd (IL&FS) is the latest to announce a non-convertible debenture (NCD) issue with a Mibor-linked yield.

It has floated an issue of non-convertible debentures for Rs 250 million, offering a spread of 2.25 percentage points over Mibor. The issue opened on July 1.

Mibor was developed and introduced by Reuters in September 1997. It is released at 4:00 pm (1030 GMT) daily and is a weighted-average of call money traded rates from 22 market players.

The issue has an interest rate cap of 15.25 per cent and a floor of 9.25 per cent and the interest will be compounded daily and paid monthly. The bonds have a maturity of one year.

"Mibor is a polled figure covering a wider range of the money market," said an IL&FS treasury official, referring to hisfirm's choice of the reference rate.

"Moreover, most money market players have access to Reuters and find it easier to verify and track Mibor," he added.

A put option at the end of each month gives the investor an exit route, the IL&FS official said.

"The initial response indicates excess interest," he said. "Call money averages have remained lower than seven per cent and our floor of 9.25 is very attractive."

Besides bigger corporates like GE Capital Services, Reliance Industries, Larsen & Toubro, some smaller firms have also opted for call money rate-linked issues.

"We have not really benefitted from the switch," said the finance manager of a Bangalore-based Japanese instrumentation company.

The company had converted its 12 per cent fixed-rate liability with a French bank into a floating rate one priced at four percentage points over Mibor.

"Call money rates have been in the six to seven per cent range since June," the manager said. "Our costs have therefore been around 11 per cent, notsignificantly better than the earlier fixed rate."

Although players in the money market are sceptical about Mibor remaining at current levels, they do not expect the cap to be tested very often.

"Interest rates in the short term are expected to harden," said the money market dealer of a small foreign bank. "But call money rates shooting to 20 per cent and above is a once-in-two-years phenomenon."

The IL&FS official however felt that redemptions will be higher and the institution will be paying interest at the higher end of the range in the second half of the year.