After the IL&FS debacle, NBFCs have chosen to raise money through NCDs.
L&T Finance, Shriram City Union Finance, Muthoot Homefin (subsidiary of Muthoot Finance) and Magma Fincorp have announced the launch of public issue to raise money by issuing non-convertible debentures (NCD).
Including the option to retain the amount of oversubscription, these three issues aim to raise Rs 2,550 crore. These NCDs are secured in nature and will be issued in dematerialised form only. Minimum application size is 10 NCD of Rs 1,000 each and thereafter in a multiple of 1 NCD.
Here are the details of the public issue:
Infographic: Ritesh Presswala/ Source: AK Stockmark, Karvy
While a AAA rating denotes a high level of safety, AA rating connotes a relatively lower safety. The same is reflected in the interest rates on offer. As one goes for riskier bonds, the interest rates on offer rise.
LTF, SCUF, MagFin and MHI have reserved 45 percent, 40 percent, 30 percent and 50 percent of their issue for retail individual investors, respectively.
LTF offered a tad higher yield in tranche 1 of its NCD issue it closed in March 2019. It offered 9.25 percent for 5 years tenure whereas it is offering 9 percent now. “Reserve Bank of India is focussed on reviving economic growth. It is expected that at least 25 basis point rate cut will happen in this monetary policy. The rates are expected to go down from here on. The same is reflected in the rates on offer,” says Deepak Panjwani, head –debt markets, GEPL Capital.
After the Infrastructure Leasing & Financial Services (IL&FS) debacle, investors turned wary of investments in non-bank finance companies (NBFC).
The liquidity crisis made many NBFC approach retail investors to raise money through such offers. This has led to many options for investors.
However, experts are cautiously optimistic. Though rates are expected to go down, investors should not blindly go for the highest possible rate on offer. Do not ignore the credit risk that comes with the bond, experts say.
“L&T Finance is a well-managed company with one of the least NPAs in the category. The AAA rating given by the rating agency further enhances confidence, making its NCD a good investment at this juncture,” says Vikram Dalal, founder and managing director, Synergee Capital Services.
Though all these bonds are listed on the stock exchanges, there is no assurance that you get an exit at the fair price. Be prepared to hold on till maturity. Hence, choosing the right tenure that suits your liquidity needs is important.
“If you opt to build a ladder of bond investments, you are better off compared to investing on an ad-hoc basis,” says Joydeep Sen, founder of wiseinvestor.in. (Read about laddering here.)Lastly, it must be noted that while NCDs offer slightly higher interest rates than bank FDs, they are not risk-free instruments.