Non-Convertible Debentures - To Invest in New NCDs or old NCDs?

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RETAIL non-convertible debentures (NCD), which took the debt market by storm last year, are back again, albeit at lower rates of interest. The retail NCD issues of at least two companies, Shriram Transport Finance and Religare Finvest, are expected to hit the market in the next few weeks, and the interest rates offered are expected to be in the range of 10.5011 per cent.

For those retail customers who already invested in NCDs last year or wanting to invest in one this year, how do these instruments fare?

What are NCD issues: Retail non-convertible debenture issues are debt instruments, just like corporate fixed deposits, where you invest some money with a company, and get back your investment after a certain period at a pre-fixed rate of interest. Investing in most NCDs is possible only through a demat account.

Check previous performance of issues: While basic factors like checking the credibility and credit rating of the issue is very important while subscribing, financial planners also advice investors to check the performance of previous issues by the company.

If a company say `ABC' is launching an issue offering NCDs at a face value of Rs 1,000, and the company's previous issue, offered at Rs 1,000, is trading at Rs 980, with interest rates on both being same, it may be wiser to buy the older issue in the secondary market, than buying the new issue. If the company's fundamentals are good and the trading value is low because of market conditions, it is a good reason to invest in the older issue as it is cheaper, he reasons.

How to compare two issues of the same company: The best way to compare is to check the present yield of the issues. Yield would be a product of the issue's face value, the premium or discount at which the NCD has been trading, and the coupon rate.

Assuming ABC's new NCD issue with a Rs 1,000 face value promises 11 per cent interest, and the company's previous issue of the same Rs 1,000 face value has been trading at Rs 1,010 with a coupon rate of 12 per cent. If you buy 10 debentures from the secondary market it will cost you Rs 10,200 and at the end of three years, assuming cumulative interest for three years, you will get back Rs 13,949 while that same Rs 10,100 invested in the new NCD issue bearing a 11 per cent coupon rate, will fetch you Rs 13,813.

Thus, the former gives you a compound annual growth rate of 11.36 per cent as against the 11 per cent offered by the latter.

Check the return option: One should also check the investment return option.
In payout type issues, the interest is paid out annually, and the investor can take back the investment at issue price, at the time of maturity. In cumulative issues, the investor takes home the accrued interest multiplied by the trading value of the NCD issues.

Since NCDs were very popular last year, and many of the companies that launched the issues, especially the gold loan companies, have been in trouble since, it is important to check the credibility of the company and rating of issues.

NCDs certainly offer more attractive returns and transparent pricing than bank fixed deposits. But, bank deposits are relatively safer. There have so far been no cases of defaults by NBFCs, but the business models of some of the companies with a single asset class may be risky. An issue with a credit rating of AA and above is advised.

 

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