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Loans Raised Through NCDs Highest in Last Seven Years
Oct 28, 2016

There is a lot of interest in the corporate debt market these days. One such instrument that has gained prominence these days is Non-Convertible Debentures or NCDs. NCDs are loan-linked bonds that cannot be converted into stock and usually offer higher interest rates than convertible debentures.

The total funds mobilised by Indian companies through NCDs during the first six months of this fiscal is just mind boggling. The loans raised have increased multifold times in just the first six months of FY17. It's the highest in at least seven years.

So what makes NCDs so popular among corporates? With bond yields falling in line with policy rate changes, raising funds via NCDs has become a cheaper source.

However, we believe that potential investors should not get carried away by the euphoria. They should assess the issue structure and the risk return considerations beforehand. Also, these NCDs are not risk free. Their ability to pay interest is dependent on the financial health of the issuer. Hence, credit rating of the issue and parentage of the issuing company must be assessed before subscribing. One would do better to look into the past track record of interest payments. Also one should see whether the issue is secured or unsecured. An unsecured issue may have a higher return but it also carries a higher risk of default. Lastly, one should assess the liquidity of such issues. If the investor is unable to lock in capital gains due to poor liquidity should interest rates fall, his return expectations could go for a toss.

The bond yields could further come down if the Reserve Bank of India takes more rate cuts, thus making the NCD route look attractive. But one should take decision on case to case basis keeping the risk of the issue into consideration.

This Chart Of The Day was published in The 5 Minute WrapUp - Howard Marks' Rule No. 1 and Rule No. 2 are Now as Important as Buffett's

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