Firms rush for NCDs ahead of RBI policy

A slew of non-banking financial companies (NBFCs) have lined up their non-convertible debenture (NCD) offerings ahead of the Reserve Bank of India (RBI) policy review on September 17. NCD issues worth more than Rs 2,000 crore are likely to hit the market in two weeks.

The Mumbai-based India Infoline Finance Ltd (IIFL) has already announced the launch of its Rs 500 crore NCD issue, while Religare Finvest Ltd, Muthoot Finance Ltd and Shriram City Union Finance Ltd have received the Securities and Exchange Board of India (Sebi) nod to raise Rs 500 crore each through NCD issues. In addition, SREI Infrastructure Finance Ltd, too, has got Sebi nod for a Rs 150-crore issue.

Experts say firms are scrambling to hit the market before the RBI monetary policy meeting to tap the demand from investors who are expecting the central bank to cut interest rates. Fall in interest rates, typically, results in capital appreciation in the value of bonds. Also, favourable response to the Rs 600-crore NCD issue of Shriram Transport Finance last month, has given much confidence to companies and bankers to launch their offerings.
 

FUND RAISING SPREE NCD issues worth over Rs 2,000 cr are likely to hit the market in the next two weeks
	Issue size (in Rs cr)
India Infoline Finance	500
Shriram City Union Finance	500
Muthoot Finance	500
Religare Finvest	500
SREI Infrastructure  Finance	150
Source: Sebi

NBFC firms are trying to attract investor interest by offering 150-250 basis points (bps) more than corporate bonds with similar tenures.

IIFL, whose NCD offering opens on September 5, has a coupon rate of 12.75 per cent on six-year bonds, about 135 bps more than the 11.4 per cent offered by Shiram Transport Finance last month. However, experts said IIFL being an unsecured issue yields on offer are higher, while it could be slightly lower for the forthcoming issues as all of these are secured NCDs.

“Typically unsecured bonds carry higher interest rates. Like in our case also, we are offering 12.75 per cent interest rate, which I guess would be typically 100-125 basis points higher then what secured bonds with similar kind of rating would have fetched,” said Nirmal Jain, chairman, IIFL.

In the event of liquidation, secured bond holders get preference as they are paid out of realisation of security, while unsecured bond holders get paid before any money is paid to the equity shareholders.

Experts said not-so-favourable prospects of other asset classes will ensure the supply of paper coming into the market get absorbed by investors.

Akhil Mangla, executive vice-president, ECL Finance, said: “Investors are getting out of equities due to the volatility and commodities such as gold seemed to have peaked. Real estate is clearly not for the small investors. Given these circumstances, there is a clear demand for debt instruments with high coupon rates. Firms are keen to tap this demand.”

Currently, 'AA-' rated corporate bonds with tenures of three to five years are quoting at yields between 10 and 10.22 per cent.

Mangla added the expectations that RBI would cut interest rates in its next policy was also driving up the demand for such issues.

Funds raised through NCDs help NBFC firms grow their lending book. As such funds qualify for Tier-II capital, it allows companies to boost their capital adequacy ratio.