Last week, India Infoline Finance Ltd (IIFL) announced its plans to raise Rs.250 crore from the public via an issue of non-convertible debentures (NCDs). The company has the option to retain additional subscription up to Rs.250 crore, taking the aggregate to Rs.500 crore.
Shriram Transport Finance Co. Ltd kicked off the NCD season this fiscal with its public offer for NCDs in July. Now you can expect a slew of offers as four other non-banking financial institutions filed for approval in the second half of August.
The IIFL issue will be open from 5 to 18 September. The biggest lure for investors is the high rate of interest—at 12.75% per annum.
The bonds on offer are redeemable after six years and come with three interest payout options (see graph). The cumulative option has the best absolute return as money invested doubles at a yield of 12.75% per annum in six years; the monthly payout option is also attractive and works for those who would like to get a pre-determined fixed monthly income.
This issue of NCDs is unsecured, which means that in the event of a claim, it would be settled only after the claim of other creditors are settled. However, they come before equity shareholders in the priority list. So if the company goes belly up, you are not the first in line to receive payment, in fact other bond holders will be ahead of you. As on March 2012, roughly 15% of long-term debt was unsecured in nature.
The company is looking at raising tier II capital and, hence, the issue of unsecured bonds. But the risk is not higher this time as the rating is the same as that of the company’s previously issued secured bonds. The issue is rated Crisil AA- stable and ICRA AA- stable. This is in line with the rating for its other outstanding NCD issues. This indicates investment grade security with high probability of meeting its financial obligations.
The company currently has a capital adequacy ratio of 17.86%, which is above Reserve Bank of India’s prescribed level of 15%, but the room for raising more tier I debt capital without adding equity is narrowing. Says Nirmal Jain, chairman, IIFL, “We can go another two years without the need to raise equity capital.”
As the company has been expanding business, its profit after tax has grown at a compounded annual growth rate (CAGR) of 45%; the loan book grew at 64% CAGR since 2007-08 till FY12. But total long-term borrowings have grown at a CAGR of 108%. The higher growth of borrowings as compared with advances may suggest slowing credit off-take, but Jain explains, “The credit off-take is healthy but we are looking at changing the debt mix and make it more conservative on asset liability management by shifting from short-term to long-term borrowings.”
What should you do?
IIFL is in the business of lending to individuals and companies. As on March 2012, mortgage loans were 45% of their total loan book and gold loans accounted for 41%. Both these business segments are expected to grow in the next few years. The real question is how comfortable are you with the company and its business growth. Says Surya Bhatia, a Delhi-based financial planner, “One has to be careful as the rating is not the best, but it is an attractive issue. The monthly payout is good for senior citizens who need regular income. But there are other issues lined up so no need to allocate everything here.”
So invest but keep allocation for other issues as well; secured issues should ideally get a higher allocation. Although the interest offered is high, it is a compensation for the unsecured nature of bonds. For the monthly payout, the company is advertising a yield of 13.52%, but that is possible only if you reinvest the payout amount at the coupon rate. So unless you need the payout, stick to the cumulative option and hold the bond till maturity. Keep in mind that the bonds will be listed on exchanges and can be traded in the secondary market if you need to exit early.