HNIs smell gains in structured credit

The super-rich clients of wealth management firms are no more enchanted with just equity. They are looking at the fixed income asset class closely, especially structured credit products.

With limited fixed income options in terms of G-secs (government securities) and debt mutual funds, wealth managers say a lot of super-affluent customers are looking at investing in structured credit — secured debentures floated by companies to raise short-term funds.

Collateral difference
In conventional secured debentures, immovable property is kept as collateral. In this case, the stock of the company is kept as collateral. So, if the stock of a company falls 10 per cent, the promoter is required to furnish 10 per cent additional equity.

The fact that the repayment amount is backed by equity makes the instrument more secure. For example, for Rs 100 worth of debenture, let’s say the collateral kept with the trustee is 2.5 times the amount, or Rs 250. If the share price falls 10 per cent to Rs 225, the promoter will have to furnish fresh shares worth Rs 25. There are also certain limits, stated in the agreement. If the stock breaches a certain level or falls 50 per cent, the trustee winds up the debenture, distributing the money to debenture holders.

“This is only for very sophisticated clients who understand the product and the risk associated with it. HNIs (high net worth individuals) have few options to take part in corporate debt, as that market is not very developed. So, structured credit provides them a window to access corporate debt papers at attractive rates. As in the case of corporate fixed deposits, the rates here vary depending on the company’s credit rating,” said Ashish Kehair, business head for private wealth management at ICICI Securities.

Returns from debt funds currently range between 1.5 per cent and 6 per cent for one year. Returns from government securities have dried up completely because yields have gone up. Gilt funds are offering 1.5-2.5 per cent. Similarly, short-term debt funds are offering 5.13 per cent and fixed maturity plans 4.71 per cent. The best performer in the category of debt funds are floating rate funds, which are offering 6.04 per cent, much lower than returns from structured credit.

Useful for short-term needs
“Companies that have come in the market have offered as much as 14 per cent if they have a slightly lower rating and 10 per cent if they are AAA-rated. This several notches better than any other fixed income instrument. A lot of promoters borrowed through this route last year, when credit offtake was not happening. These are customised deals between corporates and ultra-high net worth individuals,” said the chief executive officer at a foreign wealth management firm.

The minimum ticket size, say experts, is Rs 5-10 crore and companies have raised as little as Rs 20 crore to as high as Rs 200 crore through this route for short-term needs. A number of companies, including real estate major Unitech, took this route recently. Crompton Greaves and Suzlon were planning such private placements, but pulled back.

“It is difficult to assess the product’s market size but there’s a reasonably large apetite for the asset. For a company, too, it makes a lot of sense, especially in case of lower-rated corporates, because it is much cheaper compared to raising funds from other sources such as banks. Investors benefit because if the credit rating of the company goes up, he makes a capital gain. Going ahead, more companies will tap this route with the revival of the capex cycle,” said Vishal Kapoor, general manager, wealth management, Standard Chartered.