Key parameters to review a Corporate Fixed Deposit

Corporate fixed deposits (FDs) have gained a fancy among investors because of high fixed returns that these products offer. Typically a corporate fixed deposit offers much higher return than a bank FD, however it comes with a high risk tag. This is because corporate deposits are unsecured in nature and unlike bank fixed deposit it is not covered by a guarantee from the Deposit Insurance and Credit Guarantee Corporation of India, which assures repayment of Rs 1 lac in case the bank defaults.

In the past, there have been instances wherein companies like Panjon Pharma, CRB Capital, Morpan Laboraties (issued equity share in lieu of Fixed Deposit) offered high returns but defaulted. Even today there is a noise that one of the real estate companies is not making timely repayment to its fixed deposit investors. However, that does not make corporate fixed deposits a bad avenue to park your funds. Just like any other investment, before you make an investment you need to study the company, the credit rating and other parameters, then make an informed decision and select the right company for making your fixed deposits.

Here we have listed some of the key parameters to review the corporate fixed deposit before making your investment.

1. The issuer company should have a strong goodwill and track record in the market and should be running its business from at least 15- 20 years.

2. Only invest in FDs of companies have been earning profit and have a continuous dividend paying track record of at least last 5 consecutive years.

3. Credit rating is one of the important parameters while selecting corporate fixed deposit. The NBFCs that offer corporate fixed deposit has to get themselves rated by the rating agencies such as CARE, CRISIL, ICRA etc., but manufacturing firms have no such compulsion. A better the rating of the FD, the safer it is to invest as the risk of default is the lowest. While a low rated FD will be risky, however the company will offset the risk by offering a higher yield to the investors.

As a thumb rule, investors should invest only in a company having AAA or AA rating. However fixed deposits or certain companies are not rated, in such cases one should deeply study financial statements of the company before making the investment in their FDs. If you are not able to understand financial statement then you can take help of financial advisor or avoid investment in unrated companies.

4. The sector outlook in which company runs its business should be positive. Avoid troubled or high risk sectors like real estate or microfinance. 

5. One should avoid company which is offering unusually high interest rates because generally companies offer higher interest rate to compensate high risk.

6. Check the history of the company, how they have paid the principal and interest to the investors.

Credit rating is your most important deciding factor while selecting a fixed deposit. Understanding different ratings can be difficult for a layman as they may not be well-versed with various jargons and rating numbers. Here's a snapshot for you to understand what the different rating means for you. The ratings are listed in descending order, where AAA is the best rating while D is the worst.

Fixed Deposit Rating CARE

 

Symbols	Rating Definition
CARE AAA	Instruments with this rating are considered to be of the best credit quality, offering highest safety for timely servicing of debt obligations. Such instruments carry minimal credit risk.
CARE AA	Instruments with this rating are considered to offer high safety for timely servicing of debt obligations. Such instruments carry very low credit risk.
CARE A	Instruments with this rating are considered to offer adequate safety for timely servicing of debt obligations. Such instruments carry low credit risk.
CARE BBB	Instruments with this rating are considered to offer moderate safety for timely servicing of debt obligations. Such instruments carry moderate credit risk.
CARE BB	Instruments with this rating are considered to offer inadequate safety for timely servicing of debt obligations. Such instruments carry high credit risk.
CARE B	Instruments with this rating are considered to offer low safety for timely servicing of debt obligations and carry very high credit risk. Such Instruments are susceptible to default.
CARE C	Instruments with this rating are considered to be having very high likelihood of default in the payment of interest and principal.
CARE D	Instruments with this rating are of the lowest category. They are either in default or are likely to be in default soon.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed deposit rating- CRISIL

Rating Scale For Fixed Deposits

Symbols	Ratings Definition
FAAA  ("F Triple A") Highest Safety	This rating indicates that the degree of safety regarding timely payment of interest and principal is very strong.
FAA  ("F Double A") High Safety	This rating indicates that the degree of safety regarding timely payment of interest and principal is strong. However, the relative degree of safety is not as high as for fixed deposits with 'FAAA' ratings.
FA  (Adequate Safety)	This rating indicates that the degree of safety regarding timely payment of interest and principal is satisfactory. Changes in circumstances can affect such issues more than those in the higher rated categories.
FB  (Inadequate Safety)	This rating indicates inadequate safety of timely payment of interest and principal. Such issues are less susceptible to default than fixed deposits rated below this category, but the uncertainties that the issuer faces could lead to inadequate capacity to make timely interest and principal payments.
FC (High Risk)	This rating indicates that the degree of safety regarding timely payment of interest and principal is doubtful. Such issues have factors present that make them vulnerable to default; adverse business or economic conditions would lead to lack of ability or willingness to pay interest or principal.
FD  (Default)	This rating indicates that the fixed deposits are either in default or are expected to be in default upon maturity.
NM  (Not Meaningful)	Instruments rated 'NM' have factors present in them, which render the outstanding rating meaningless. These include reorganisation or liquidation of the issuer, and the obligation being under dispute in a court of law or before a statutory authority.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note:  1) CRISIL may apply '+' (plus) or '-' (minus) signs for ratings from FAA to FC to indicate the relative position within the rating category.

 

Rating, Interest Rate & Risk

Listed below are fixed deposits offered by few companies, their ratings and interest rate offered by them. In the last column, we have highlighted the risk level of these FDs on the basis of the rating they received.

Company Name	Rating	Rate of Interest p.a. (in %)*			Risk
		1 Year	2 Year	3 Year
ICICI Home Finance Ltd	AAA	8.25	8.75	8.75	Low
LIC Housing Finance Ltd	FAAA	9	9.25	9.5	Low
HDFC	FAAA	9.5	9.65	9.75	Low
Shriram Transport Finance Ltd(Unnati)	FAA+	9.25	9.75	10.75	Medium
Plethico Pharmaceuticals Ltd	Unrated	11	11.5	12	High
Parsvnath Developers Ltd	Unrated	11.5	11.75	12	High
United Spirits Ltd	MA- (Stable)	11	11.5	N/A	High

 

 

 

 

 

 

 

 

 

*Interest rate as on 30/11/2011. Details retrieved from website of the respective company.

- Umesh Rathi

The author is Principal Financial Planner at ARIHANT Capital Markets Ltd.