Edelweiss NCD offers up to 9.70%; should you go for it?

 The effective yield offered by the company is 9.09-9.70%. In comparison, NCDs by some of the other non-banking financial companies such as LIC Housing Finance, ICICI Home Finance and HDFC are offering interest in the range of 5% to 6%

Edelweiss Financial Services Ltd on Thursday will launch a secured non-convertible debenture (NCD) issue of up to ₹400 crore, offering an effective yield of up to 9.70%. The issue will close on 23 April. The issue has a base size of ₹200 crore with a greenshoe option to retain oversubscription of up to ₹200 crore.

In the draft prospectus, the company said it operates in a highly competitive market and faces significant competition from other players.

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“Many of our competitors are large institutions, which may have a larger customer base, funding sources, branch networks and capital base compared to us. Some of them may be more flexible and better positioned to take advantage of market opportunities. This competition is likely to further intensify as a result of liberalization and regulatory changes," Edelweiss said.

While the issue is secured, the security is against the future cash receivables of the company. According to the firm, the funds raised will be used for repayment or prepayment of interest and principal of existing borrowings as well as general corporate purposes.

As much as 40% of the issue has been reserved for retail and high net worth investors, each.

The issue offers up to 9.70% yield for a tenor of 120 months and the issue has been rated AA with negative outlook by Acuité Ratings & Research and AA- with stable outlook by Brickwork Ratings. These ratings mean that the debentures carry low credit risk but are not as safe as AAA-rated instruments, while a negative outlook means that a rating may be lowered in the future.

The issue comes with three tenors (36, 60 and 120 months) and three options for interest payment frequency (annual, monthly and cumulative).

The effective yield offered by the company is in the range of 9.09% to 9.70%. In comparison, NCDs by non-banking financial companies such as LIC Housing Finance, ICICI Home Finance and HDFC are offering interest in the range of 5% to 6%. Experts say that an NCD issue offering higher returns will have a high

“The higher the returns, the more risk the issue will have. Investors in a fixed income must realize that anything below an AA rating comes with credit risk. Even as the rating is AA for the Edelweiss issue, the rating agencies are not among the bigger names. Moreover, one of the rating agencies has a negative outlook on the issue. This issue is only meant for people who understand the risks of investing in a credit paper, and even if they are investing, they should only go for the lowest tenor, which is 36 months," said Kirtan Shah, chief financial planner at Sykes and Ray Equities (I) Ltd.

Investors must note that redeeming NCDs before maturity might be a challenge, as the Indian debt market is not that deep. They must also be mindful of taxation, as interest earned on these NCDs is taxed at the income tax slab rate.