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This NCD Issue With Yield Of 9.95% p.a Is On Offer: Should You Invest?
NCD or non-convertible debentures are fixed-income instruments issued by companies to raise long term funds from the general public for business purposes. In turn, these companies pay an interest over the principal amount. Such bonds carry a fixed maturity time-frame as well as interest.
And currently in the low interest rate regime when returns have toppled on bank FDs deemed to be the safest instrument to park funds, Edelweiss Financial Services has hit the market with its NCD issue offering up to 9.95% effective yield per annum to raise a sum of Rs. 200 crore. Now, here is a lowdown as to whether or not you should consider this fixed-income option for investment:
1. Issue details:
This secured redeemable NCD issue opened on December 23, 2020 for public subscription and will run until January 15, 2021 with the option of early closure.
- Face value for each NCD is Rs. 1000
- Base issue size: Rs. 100 crore with a greenshoe option of retaining oversubscription up to Rs 100 crore, which takes the issue size up to Rs 200 crore.
- Minimum application: for 10 NCDs across all series (i.e. minimum investment of Rs. 10000) and in multiples of Rs. 1000 thereafter.
2. Issue objectives:
75% of the funds mopped through the issue will be put towards repaying or pre-paying interest and principal of the current liabilities of the company and the rest shall be used for general corporate purpose.
3. Interest rate:
| Series | I | II | III | IV | V | VI | VII |
|---|---|---|---|---|---|---|---|
| Interest payment frequency | Annual | Cumulative (At the end) | Monthly | Annual | Cumulative | Monthly | Annual |
| Tenure | 36 month | 36 month | 60 months | 60 month | 60 months | 120 months | 120 months |
| Coupon (% p.a.) | 9.35 | NA | 9.39 | 9.8 | NA | 9.53 | 9.95 |
| Effective yield (% p.a.) | 9.35 | 9.35 | 9.8 | 9.79 | 9.8 | 9.95 | 9.94 |
| Amount on maturity | Rs. 1000 | Rs. 1307.55 | Rs. 1000 | Rs. 1000 | Rs. 1596.35 | Rs. 1000 | Rs. 1000 |
Interestingly in a case where investors have not indicated their choice of NCD series, Series I will be allotted by default. Also, for previous bond holders of Edelweiss or group companies including ECL Finance, Edelweiss Housing Finance, Edelweiss Retail Finance, Edelweiss Finance and Investments or shareholders of Edelweiss Financial Services, the issue comes with an additional return of 0.20% per year, taking the total pay-out from the instrument to up to 10.15% per annum.
4. Credit Rating:
Care Ratings has rated the offering CARE A+; with stable outlook and Brickwork Ratings India Private has rated it as BWR AA-/Stable. Stable rating outlook implies expected stability or retention of the rating in the medium term due to stable credit risk profile of the company in the medium term. The rating though suggests that the issue carries some amount of credit risk.
5. Conclusion:
Experts are cautious on the issue as an A rating suggests a degree of credit risk. Aggressive investors can bet on the issue for a term of 3 years instead of a long term investment of 5 or more years. This is because even as the rating provides a Stable outlook, it has a tendency to change over time so investors need to give heed to this aspect also. Nonetheless conservative investor class with no understanding about credit risk should certainly avoid it. Besides, interest earnings made on NCDs are fully taxable as per the individual's slab rate in the year of receipt. So, despite the positive real return from the instrument post taxation and better interest rate than bank fixed deposits, the NCD issue by Edelweiss is not for all.
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