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  4. Private bond placements – how to use our recommendations

Private bond placements – how to use our recommendations

March 3, 2022

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

private bond placements

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.  Even where they are listed, you may not find takers or sellers for the bond in the regular stock exchange route.

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 often 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. When it is a primary issue, they receive a commission from the issuer of the bond. In the case of secondary issuances (which is often the case), the yield at which they buy and the yield at which they sell to you (lower than what they buy) would carry their margin. In other words, the price at which you buy would be at a slight premium to their own cost. This is typically the model for debt market and there may be exceptions.

Suitability of these bonds

  1. 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.
  2. 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.
  3. Because of the high minimum ticket size, often hovering at Rs 10 lakh per issue (although online bond platform make available bonds with a minimum ticket size of Rs 1 lakh), 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.
  4. 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.
  5. 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.
  6. Interest income from these bonds will be taxed as ‘other income’ and TDS will be applicable. The issuing company will deduct the same.  If the bond is listed and you sell the bond in less than a year, short-term capital gains will be taxed at your tax slab. If you sell after a year of holding, then long-term capital gains tax of 10% without indexation will apply. If the bond is unlisted, then you will have to hold the bond for 3 years to qualify for LTCG. Such tax will be 20% without indexation. Please note that these tax laws are subject to change.

Research process

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.

#5 Tenor

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.

Where to buy these bonds

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 online bond platforms or intermediaries. We are not commercially involved with these platforms in any way. We only refer to these platforms to gather information.

In each bond report, we will mention where we found the availability of the bond – it could be a SEBI-registered online broker or a debt broker. You will need to do your own due diligence before opening an account with such platform and investing in the bond.

Important disclaimers – please read

  • In an endeavour to provide you with select recommendations of privately placed bonds, we look at various bond platforms to handpick a few and review them here.
  • We do not have any kind of commercial agreement with the bond issuers nor bond platforms nor the vendors of these bonds.
  • We are not operationally involved with any of the platforms in any way. You will need to have an account or get in touch with the respective bond platforms yourself.
  • We provide a review/recommendation of the bond based on the risk-return pay off of the bond and should not in any way be construed as an advice on your portfolio. The suitability of this product for your portfolio would be based on your own risk appetite, goal, income need and time frame. You should consider these factors or consult a registered advisor before investing.
  • Since this is a secondary sale of a privately placed bond through a platform, there is no guarantee on how long it will be available. It might last a few days to a couple of weeks. You will need to check the bond website or check with the broker on its availability.
  • The yields mentioned in our bond reports are tentative and subject to changes based on the availability, time and demand of the bond at the time of your purchase. This should not be construed as the final yield.
  • Even if a bond is listed and will be credited to your demat, there is no guarantee on its liquidity. You may check with the broker/platform if you wish to sell them.
  • Unless otherwise mentioned, our call on the product would be a buy and hold.
  • In the case of coverage of perpetual bonds, the yield to call would be the yield mentioned and the assumption is that the bond can be sold on such call date.
  • We do not guarantee any safety of principal or safety of transaction in the platform that you operate in. You will need to do your own due diligence before opening an account with any of the platforms. We have merely taken information of the bond availability on such platform and our review is restricted to the bond sale and its risk-return payoff.

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