Edelweiss Financial Services (EFS) is issuing Secured Redeemable Non-convertible Debentures (NCDs) for investors. The issue opens today for subscription. In a low interest rate environment, the coupon rate on the NCD offer appears attractive.
However, investors must understand the risks involved before shelling out their money. What's on offer There are eight series of NCDs, carrying fixed rates of interest in the range of 8.75-9.7 percent, payable on tenures of 36 months, 60 months and 120 months.
There are annual, monthly and cumulative interest options. This leads to effective annual yield in the range from 9.09 percent to 9.70 percent. An additional 20 basis points will be paid to those investors who own the shares of EFS or previous bonds or NCDs issued by EFS or its subsidiaries.
The face value of the NCD is Rs 1,000 and the minimum investment required is Rs 10,000 across all NCDs put together. The NCD will be issued in dematerialized form only and will be listed on the BSE. The Rs 400 crore NCD issue, including the green shoe option, is rated Acuite AA (Outlook: Negative) and [ICRA] A+ (Negative). Nearly 75 percent of the money raised will be used for servicing existing borrowings.
What works The non-banking financial company (NBFC) is into retail & corporate lending, asset management, insurance and wealth management. Since this NCD is secured (against assets of the company), investors have a senior claim in case of any liquidation.
"After the IL&FS crisis, many NBFCs faced severe challenges. COVID-19 further worsened the situation for a few. Though we are not completely out of it, the macroeconomic situation is gradually improving, which may work for a few well-managed NBFCs," observes Ankit Gupta, Co-Founder and CEO, BondsIndia.com.
Investors looking for regular income and higher interest rates may find this offer an attractive bet. What does not work Though the interest rates on offer are high, the credit rating connotes inadequate safety when compared to that on AAA or AA+ rated bonds.
This is akin to investing in credit risk funds which invest in bonds with AA and below rating. "Though the interest rate on offer compensates the investor for the higher credit risk taken, the NCDs are meant for only those investors with commensurate risk appetite," says Joydeep Sen, Corporate Trainer - Debt. "A rise in non-performing assets is reported by some NBFCs and clarity will emerge about the entire sector by the September quarter," says Vikram Dalal, Founder and Managing Director, Synergee Capital Services. "A small exposure to the EFS NCD can be taken by matured investor who understands the macro economic conditions of the economy," he adds. NCDs offering similar rate of interest as the EFS issue, in the recent past, have been trading below the face value in the secondary market, thus offering higher yield.
You can also shop there if you are looking for small quantities. But do account for brokerage payable in the secondary market and the additional coupon available for existing investors in the public issue. Also, a public issue allows large investments.
The illiquidity in secondary market may not get you the right number of NCDs. What should you do? "Since this is a medium risk-moderate returns investment, make up to 20 percent of your high yield allocation to this NCD if you can stomach risks," says Gupta.
He recommends exposure to only three and five-year NCDs and not to the 10-year one. Experts are of the opinion that we are in a rising interest rate scenario. If interest rates move up fast or the credit rating is revised downwards, then there may be marked-to-market losses. "The secondary market for bonds with less than AA rating is generally illiquid.
So even if you wish take credit risks, be prepared to hold on to the bonds till maturity," says Sen.The issue closes on September 6, 2021.