This is an article announcing our launch of coverage of privately placed bonds. Our first recommendation will be out on Monday. If you wish to be ready to invest in these bonds (they may not be open for long), please read the process for account opening here.
The product space of fixed income instruments (deposits/bonds/NCDs etc) in India has been growing steadily in recent years. Apart from meeting the requirements of borrowers, this growth is slowly and steadily meeting the requirement/demand from investors for a wider range of debt investment options – a need most acutely felt in the recent low-interest periods.
At PrimeInvestor too, we have been constantly facing questions from our subscribers asking for more than FDs and the occasional NCDs.
Currently, in the debt space, our recommendations span debt mutual funds, deposits across banks, small finance banks, NBFCs and small savings schemes besides select public bond issuances. Now, these are products that are widely suitable for any investor and form part of your various financial goals.
But the debt market is much bigger than just these products, and the options for a retail investor are expanding as well. As a result, we have been taking steps to expand the range of recommendations in the fixed income space for you.
We began recommendations in central and state government bonds (SDLs) last month. Now, we’re kicking off our next initiative – one that is unique in the market, and one that we believe will add significant value to your investment portfolio – that of recommending bonds that are placed privately. Private bond placements take place when a company wants to raise debt from the market, but doesn’t offer this to the investing public at large. Investment bankers offer such bonds to a private group of investors.
We are happy to start our coverage of these private bond placements issuances.
This offering is unique for four reasons at this point:
- One, it can be a significant value add to your portfolio if you are looking for higher yielding debt options especially in this present low-rate scenario, and you have a large corpus that can do with diversification. Privately placed typically offer more variety than public NCD issues because of a wider variety of issuers (banks, NBFCs, companies) and tenures (from short term to perpetual).
- Two, these are not bonds that will come to your notice in the ordinary course as they are not public issues. There is limited information on their availability as well as their quality/credit worthiness. With PrimeInvestor, you have the advantage of taking our unbiased and independent research view before deciding to go for such issues. These are otherwise offered only by wealth management desks where there can an element of bias, if they earn commissions from the same bonds.
- Three, PrimeInvestor will probably be the first independent entity to offer such research on these bonds. We don’t think there are any retail research houses that provide these recommendations without also being distributors/dealers of such products.
- Four, we also tell you how you can invest in these bonds. We plan to do this without getting into ANY kind of commercial partnership (no commissions, distribution fees, referral fees, or any fee of any kind) with the intermediary.
This offering is exclusively for our GROWTH SUBSCRIBERS.
Here, we explain what private bond placements are and their suitability, besides how you can invest in them. Additionally, we also detail our research process in these bonds for you to understand the checks we put in place to mitigate risks and pick the right opportunities.
Private bond placements
If you are familiar with non-convertible debentures (NCDs) that are often publicly issued, you will know that these are debt instruments that allow a company to borrow money from the public. Any company that would like to borrow through bonds can also decide to do this privately. In such cases, it issues bonds to a select set of investors such as individuals, HNIs, institutions to raise money.
You will hold these bonds in your demat account but they may or may not be traded on the exchanges. That means you may not be able to sell them easily. Bond dealers may still create an off-market to buy and sell them on your behalf.
Privately placed bonds are not meant for small investors and typically target HNIs and institutions. So they typically carry a high minimum investment limit, which could start from Rs 1 lakh and go up to any limit, though the usual minimum is Rs 10 lakh. You will be able to buy these bonds through select bond dealers who act as intermediaries between the company that issues the bond (borrower) and the investor (buyer of the such bonds). Such intermediaries do not charge you directly, but receive a commission from the issuer of the bond.e bond.
Suitability of these bonds
- We recommend that you park a chunk of your income-generating portfolio in safe government-backed options or bank deposit options first. You should consider these bonds only after you exhaust those options.
- Privately placed bonds do not suit everyone. If you are able to identify your need/situation with any of the points given below, you can consider them. Privately placed bonds can be a mix of low risk and high-risk options. However, since our endeavor through this research offering is to provide higher yielding options, you should treat these as very high-risk options in your portfolio. Only investors with a large corpus and a high risk appetite should go for these products.
- Because of the high minimum ticket size, usually hovering at Rs 10 lakh per issue, you need to have a large corpus in debt to adequately diversify across such bonds. Do not invest your entire lumpsum in one bond. We will mention the nature of risk and whether you need to keep exposure low to certain bonds over others.
- Unlike public bond issuances that come with multiple payout and cumulative options, these private issuances may offer only payout options and only a single option may be available (like monthly, quarterly, or annual). To this extent, there will be a tax impact on interest earned. If your aim is wealth building and you are willing to bear the tax impact for the higher returns, it is up to you to reinvest the interest to ensure you are compounding.
- These bonds are not liquid and may not be traded in the market. While the intermediary may be able to help you sell the bonds off market, there is no guarantee that you can liquidate these bonds at will. Hence, they are best viewed as buy and hold instruments to generate high income.
Other important points to note on these bonds are as follows:
- We are partnering (without any commercials or commissions) with a bond intermediary to ensure you are able to buy these bonds. The payment for these transactions will mandatorily need to be in RTGS. So, if you are trying to act upon our recommendations, you will need
- a demat account (any demat you may already have),
- complete an onboarding & KYC to open an account (called a ‘counterparty’) with the intermediary/ clearing corporation, and
- be able to do RTGS online.
- Please note that RTGS has a minimum transfer requirement of Rs 2 lakh. Hence, any investment you make through this channel cannot be less than Rs 2 lakh. There may be many cases where the minimum ticket size itself is very high.
- Interest income from these bonds will be taxed as ‘other income’ and TDS will be applicable. The issuing company will deduct the same.
Where to buy them
Since these are private placements, they are available through intermediaries or sub-brokers of such intermediaries – like wealth managers, family offices and so on. At PrimeInvestor, we are neither brokers nor sub-brokers. So, the only way for us to get information on such private placement is from the intermediaries. For this purpose, we have partnered PhillipCapital (India) Pvt. Ltd, a SEBI registered broker and clearing member of both NSE and BSE with presence in India for 21 years.
IMPORTANT DISCLAIMER – PLEASE READ
PrimeInvestor has a non-commercial partnership with PhillipCapital (India) specifically for receiving information on bond issuances. PrimeInvestor does not receive, directly or indirectly, any commission or any other reimbursement in any form – from any of the parties involved in the issuance. We are not brokers nor distributors.
PrimeInvestor is not involved in the onboarding process nor in the execution of these transactions and as such is not liable for any acts of commission or omission. We will be unable to take on any kind of operational queries regarding these transactions. The link at the end of the article will detail how you can open an account, transact and get your queries addressed. Our responsibility is limited to recommending these products based on information available to the best of our knowledge. Despite best effort on due diligence, there is a risk of default in these instruments.
Investors would need to take an informed decision about taking on such risk. Such risk is entirely that of the investor. PrimeInvestor absolves itself of any risk of non-payment of interest or principal from the instruments it recommends.
PhillipCapital is an integrated financial services company offering a full range of financial services to HNI and retail investors as well as corporate and institutional clients. Established in 1975 and headquartered in Singapore, it has presence in 15 countries. The firm has promoter capital in excess of US $ 1.5 billion, global AUM of US $ 47 billion and over 1.3 million customers worldwide.
The fixed income unit of PhillipCapital (India) has been providing investment opportunities for bond investors across categories such as tax-free bonds, AT1 bonds, PSU bonds, market linked debentures and unlisted high yielding subordinate debt. They are also buyers of the securities that they sell, in order to help their clients liquidate their holdings if they need to. In the past 24 months the fixed income division has participated in 36 primary issuances raising Rs 3,100 crore.
One of the reasons behind our choice of partnering PhillipCapital (India) is their philosophy with respect to offering fixed income options.
- For one, the firm appears very selective in the choice of issuers and has worked with a selective list of about 11 issuers thus far.
- Two, it does not execute any papers from issuers with AUM of less than Rs 10,000 crore and NNPA of over 5%.
- Three, it has a reputation of turning down issuers who do not meet its criteria. The firm also has a track record of abstaining from papers where coupon rates have fallen without any commensurate reduction in risk.
Given below is an outline of the criteria we look at before we filter these instruments.
Our research process in selecting these bonds considers the aspects outlined below.
#1 The issuer – financial health and quality
However attractive yields may be, the fundamental strength of the issuing entity takes priority in any offer. Towards this end, we run exhaustive checks on the financials of the issuer to gauge the level of risk involved.
In financial companies – which account for the bulk of such issuances – there are a range of factors that indicate the investment worthiness of its bond. The loan book is one, including its break up, growth, risks in each lending segment, and collecting efficiency. NPA ratios are another, both current levels and how they have moved. The entity’s capital adequacy, asset quality, profitability, return metrics and so on are yet another. The financial strength of the lending group as a whole, its asset strength to protect the issuing company is also a key factor. We may also use subjective factors such as a group’s governance record to filter out issuers.
If the issuer’s performance across these metrics hold up, the bond issue is added to our initial shortlist. From there, the analysis then focuses on the issue itself. Here, there can be other risks that would hold us back from issuing a recommendation.
#2 Credit rating and changes in rating
Apart from the business and financial fundamentals of the issuer, the bond’s credit rating as well as the credit rating of other debt issues by the company are other key factors we consider. There are two ways in which we use credit ratings. First, as a gating criterion – typically, we wouldn’t consider bonds with credit of below A/A-.
Second, we see the trends in credit ratings to understand potential changes that current financials may not throw up. For example, gradual upgrades in ratings may be an indicator of improving credit strength of the issuer which could also signal upgrades in the future.
On the other hand, previous downgrades and their reasoning, rating withdrawals due to lack of compliance, downgrades in group entities and so on are all risk factors. This apart, ratings of other debt that the company has taken on also indicate the relative risk involved in the current issue.
#3 Does yield match risks
Having drawn up an understanding of the issuer as a whole, the call then is on the current bond being issued. Obviously, the interest or coupon that the bond pays out is the primary factor. But looking at coupon rates in isolation isn’t really going to help. What’s important is whether the coupon compensates adequately for the risk taken in that bond.
To that end, we look at the spread the coupon offers over comparable government bonds or small savings schemes available to you, besides the spread to its rating category. If a 3-year bond is rated AA – we’d see the spread of this over the 3-year g-sec and the average spread of AA-rated bonds over the g-sec. We also look at how low risk options such as AAA-rated papers with similar residual maturity can yield.
#4 Issue structure, security backing or other risk-mitigating options
Given the range of debt instrument types, we also look at how the bond is structured. We’d be wary of recommending perpetual bonds, for instance, unless we have reason to believe in the strength of the issuer. We are also careful about bonds with complex structures as it gets hard to judge the exact risks or return involved. Our preference would also be for bonds that are backed by security or where the company’s loan book is itself secured.
The tenor or maturity period of the bond issue assumes importance in two ways. One, in relation to the level of risk involved in the bond – longer the maturity, tougher the call on the issuer’s business and thus higher the credit risk. Where maturity periods are longer at 4-5 years, the presence of risk-mitigating factors could make the bond issue worth investing in. We would prefer to avoid very long-term bonds due to unpredictability over both risks and rate direction.
The second reason maturity is important is the state of the rate cycle we are in. Going for longer-term bonds where the rate cycle is turning upwards can lead to mark to market losses. But locking into long term bonds near rate cycle peaks can be a profitable trade.
#6 Our view on rate direction
Our view on where rates are headed in future decides what kind of tenors and issuers we recommend. A concrete rate view helps us decide whether to wait for rates to move up and better opportunities will come by or to lock into current yields.