10.2% IIFL NCD Issue Comes With Call Option: Should You Invest?

After the recent Mahindra Financial and Shriram Transport NCD issue, issue of IIFL opens today with a higher return. NCDs are fixed income instrument that pay principal payment on maturity

10.2% IIFL NCD Issue Comes With Call Option: Should You Invest?

Investors can subscribe for a minimum of 10 NCDs that are priced for Rs. 1000 each.
The NCD issue comes in 10 options with tenure spanning between 3 to 10 years.

Objective of the issue: To repay its previous borrowings as well as to further lend money, the NBFC company is raising funds via this route. As per the prospectus, the company's loan book of 82% comprises retail segment while the remaining is institutional as of March 31, 2018. And the institution include mainly real estate and though this is high risk, the exposure of as much as 18% is considered to be okay.

Credit rating: And as far as the higher returns are considered, investors shall be given a premium due to the low credit rating of the instrument. CRISIL has rated IIFL bond issue as 'AA/Stable' that implies or is given to instruments deemed to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk."

Returns: When it comes to return, IIFL NCDs offer much higher return in comparison even to bank deposits. For instance, SBI on its 5-year deposit offers 7.03% whereas IIFL offers 3 per cent points more.

Tenure	Effective yield
39 months (Annual)	9.6%
39 months (Cumulative)	9.6%
60 months (monthly)	10.20%
60 months (annual)	10/20%
120 months (monthly)	10.47%
120 months (annual)	10.50%

Call option in IIFL NCDs: The company can withdraw its NCD investment mid-way. This means that IIFL can withdraw its NCDs mid-way. Its 39-month NCD can be called back after 24 months (another reason to avoid this option), 60-month NCDs can be called back after 30 months and 120-month NCDs can be called back after 66 months. So, in case the interest rate regime heads southward, the company can still raise funds at a lower cost which is beneficial for the company but not for the investor.

Conclusion: IIFL offers three-year, five-year and 10-year options. Avoid the 10-year option, as the longer tenure is strictly a no with NCDs. One can go with 3 and 5-year secured IIFL NCD issue. And of the six available options, 5-year option with an effective yield of 10.20% is the most attractive but you always need to account for the low credit rating as in the past some of the companies with this rating have defaulted.

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