Riding the NCD wave

NCDs have had notable success in recent history. Corporates are viewing this instrument as the best bet to raise funds and demand from retail and institutional investors is high. While there are inherent risks compared to bank FDs, post tax returns are attractive in many cases. Further, reputed issuers are securing these by a charge on company assets. A word of caution: Always check the credit rating and stay away from low rated paper and issuers with generic or vague fund-raising propositions.

July 21, 2011 10:49 IST | India Infoline News Service
The past one year has been a story of consistently soaring inflation and elusive liquidity crunch. No wonder, interest rates are cyclically rising while the stock market remains noticeably passive. Going forward, equity investments are likely to remain sluggish in the medium term. In such a subdued environment, it’s no wonder that corporate entities, more so the NBFCs, have clung to Non-convertible Debentures (NCDs) as their best bet to raise funds from the market. Many renowned NBFCs have announced NCD issuances offering interest rates of 11-13% for a period of 3-5 years.
NCDs make better business sense for NBFCs on other counts too. Bank funding is unattractive for two reasons - one, the latter has become significantly expensive in the past nine months and two, news of forthcoming regulation governing bank loans is being viewed as a market deterrent. NBFCs are prohibited from raising funds through ECBs and FCCBs. And yet, NBFCs have a steady requirement of long-term funds to minimize Asset Liability Management (ALM) concerns including mismatches. The NCD vehicle is thus a market need, not hype as it seemingly appears to be.
While NCDs have found obvious favor with the supply side, it spells good news for the demand side as well during this period of gloom that pervades the equity offerings. Even the other avenue of bank FDs, commercial deposits and Government bonds offer much lower return as compared to the high interest tagged with NCDs. And since they are issued in dematerialised form, there’s no tax deduction at source unlike corporate and bank FDs. Agreed that NCDs, again, unlike bank FDs are fraught with inherent risks, a prudent choice from the plethora of offerings should ensure steady and safe returns. Most NCDs from reputed entities are secured by a charge on the issuing company's assets and therefore enjoy stable-to-high investment grade (AA/AA+) rating from agencies like CARE and CRISIL. Steer clear of issuers with low ratings and generic or vague fund-raising propositions in the name of growth, expansion or debt retirement.
The current market scenario has already given its verdict in favour of NCDs. Recent issuances by credible NBFCs have been happily lapped up by all classes of investors - whether retail buyers, high net worth individuals or institutional investors. A case in point is the Shriram Transport Rs10bn NCD issue. The issue offering interest in the range of 11.35% (annualized for 3 years) to 11.6% (annualized for 5 years) got over-subscribed on the first day itself. Given the high attention, the NCD (11.6%, 5 years) listed at a premium price of Rs 1,021 on July 18 while closing the day at Rs 1,031, ensuring a ~3% return on the listing day. More importantly, the traded volume of more than 2mn implied that investors who failed to secure sufficient allotment made the numbers by virtue of secondary market purchases. Over the past couple of days, the price has further inched up to Rs 1,035 implying YTM of ~11.2%. 
As instruments of comparable credit quality offer lower yield-to-maturity (YTM) in the secondary market, the high-interest NCDs are creating their own liquidity. Lately, wealth managers are busy arranging secondary sale of allotted NCDs for retail and HNI investors for handsome short-term gains. What’s more, investors can also exercise ‘put option’ after the lapse of specified years from the date of the issue. 
“The views and opinions expressed above are that of the author who is heading the India Private Clients & Retail Research Desk of India Infoline Ltd. (IIFL).” The views, opinion and the information provided are based on publicly available data and other sources, which are believed to be reliable. Efforts are made to try and ensure accuracy of data however, IIFL and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. The views and opinion are purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are current opinions as of the current date and may be subject to change from time to time without notice.
India Infoline Investment Services Limited ("IIISL"), subsidiary of IIFL, is subject to market conditions and other considerations, proposing a public issue of secured Redeemable Non-Convertible Debentures and has filed a Draft Prospectus with the National Stock Exchange of India Limited, the Bombay Stock Exchange Limited and Securities and Exchange Board of India (for record purposes). The Draft Prospectus is available on its website at www.iiflinvestments.com, on the websites of the stock exchanges at www.nseindia.com and www.bseindia.com and the respective websites of the LMs at www.axisbank.com, www.jmfinancial.in and www.akcapindia.com.
The views expressed above should not be construed in any way an offer, solicitation or advertisement with respect to the purchase or sale of NCDs proposed to be issued by IIISL and no part of it shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. Investors proposing to participate in the Issue should invest only on the basis of information contained in the Draft Prospectus. In addition, investors should pay particular attention to the section of the Draft Prospectus titled “Risk Factors”.

FREE Benefits Worth 5,000



Open Demat Account
  • 0

    Per Order for ETF & Mutual Funds Brokerage

  • 20

    Per Order for Delivery, Intraday, F&O, Currency & Commodity