Two non-convertible debenture (NCD) issues—of Dewan Housing Finance Corp. Ltd (DHFL) which is open to the public and JM Financial Credit Solutions Ltd which opens on 28 May—have raised the return expectation from the debt market.
DHFL’s AAA rated NCDs are available at an interest coupon of up to 9.10% per annum. JM Financial Credit Solutions’s AA rated NCDs have a coupon of at least 9%.
AAA credit rating signifies the highest ability to fulfil financial obligations like interest payment and principal repayment, while AA rating signifies good financial health and ability to repay financial obligations; AA rated companies are considered a notch lower than AAA rated ones.
What’s on offer
DHFL’s issue offers seven series, including one with a floating rate coupon. If you invest for 3- or 5-year tenures, there is a monthly payout series as well, all other series offer the annual interest payment option.
Individual investors are being offered one-time additional interest ranging from 0.5% to 1% per annum along with the last interest payment for 5-, 7- and 10-year tenures.
JM Financial Credit Solutions’s issue has six different series on offer, including one with a cumulative interest payout. Given the relatively lower rating compared to DHFL, it is offering a higher coupon (see graph).
Both issues are secured debentures, which means investors have a claim to defined assets in the event of non-payment of dues by the companies.
Should you invest?
At 9.1% per annum, the post-tax earning for an investor in the highest tax bracket will be around 6.2%; for those in the 10% tax bracket, it will be around 8.16%. The post-tax earning for those in the 10% income tax bracket is 8.5% and 8.74%, respectively, for the 9.5% and 9.75% annual coupon; this is attractive compared to the current one-year fixed deposit rates. Current debt fund returns also look lacklustre in comparison.
“The issue has come at a good time, we haven’t seen these yields for a while and debt fund returns have been quite volatile. DHFL NCD with the monthly interest option works for conservative investors looking to get regular income. Plus, demat holding means there is liquidity if one wants to exit sooner or take advantage when yields start to fall,” said Gajendra Kothari, managing director, Etica Wealth Management.
If regular income is what you need, consider these NCDs for medium-term debt allocation, but don’t switch your long-term equity allocation to these issues. Also, be mindful of risk and be careful not to over-allocate.
According to Tarun Birani, founder and director, TBNG Capital Advisors Pvt. Ltd, “The locked in holding and single issuer risk is not favourable for NCDs. Secondary market nuances are difficult for retail investors to follow. Debt fund returns are not looking good for the last year, but at these high yields, returns going forward can start to turn around.”
Both issues are proposed to be listed and you have a secondary market exit option if you want to sell before maturity, but market prices may not be efficient for larger quantity.