HNIs, family offices buy corporate bonds at high yields, reap benefits

The yields of some prominent companies are still at very high levels and high net-worth individuals and family offices, who are lapping up these bonds at very attractive rates, are reaping the benefit

Bond market liquidity may have seen substantial improvement thanks to the efforts of the Centre and Reserve Bank of India (RBI), but it is not synonymous with a revival in risk appetite, especially when it comes to non-banking financial companies (NBFCs).

Yields of some good-name companies are still reigning high. However, the ones making hay are the high net-worth individuals (HNIs) and family offices, who are lapping up these bonds at very attractive rates. Most of these bonds are set to mature in a year or within three.

The disruption in public markets for bonds, on the back of redemption pressures in credit risk funds, has resulted in the widening of secondary spreads for issuers, according to Nachiket Naik, head (corporate lending) at Arka Fincap.

“The absence of investment appetite in public markets has resulted in surging interest from the private side family office investors, who have been buying these bonds at significantly higher yields to the same issuers primary issue pricing,” said Naik.

Experts say the strong interest from private investors stems from the fact that the RBI and government have both demonstrated their ability to bring financial stability into the bond market and infuse liquidity into NBFCs.

A short-term bet of 1-3 years at a high yield is fair game for these investors, even after a spate of defaults of late.

One example of this is Dewan Housing, which has seen its bonds trade at 477 per cent yield, according to NSE data. These bonds are now priced at close to Rs 20 for a face value of Rs 100, with maturity in less than a year. Therefore, if an investor buys these bonds at say Rs 20, and gets repaid at Rs 100, she is making five times on her investment. Even if the bond is getting repaid at Rs 40, which is a significant discount to its issue price, the investment doubles for the investor in just a year.

ECL Finance bonds, floated by Edelweiss Group, were trading at a yield of 25 per cent, whereas Shriram Transport’s December 2024 bonds were trading at 15.25 per cent.

Even IndusInd Bank has seen its perpetual Tier-1 bonds trade at 13.8 per cent.

"The risk in perpetual bonds is different from that in normal bonds. As the YES Bank episode has shown, if a bank is in stress, it may forego complete payment. IndusInd is not going to be in stress like YES Bank, but all bank perpetual bonds have been hammered down by investors after the YES Bank fiasco," said a banking analyst with a domestic brokerage.

To be sure, spreads have narrowed down substantially as the RBI has infused close to Rs 9.6 trillion in liquidity through various measures.

RBI Governor Shaktikanta Das had said during last week’s monetary policy review that the central bank’s measures had led to the spreads of 3-year ‘AAA’-rated corporate bonds over government securities (G-secs) reducing to 50 basis points (bps) by end-July, from 276 bps on March 26.

Spreads on 'AA+'-rated bonds softened from 307 bps to 104 bps, while spreads on ‘AA’-rated bonds narrowed from 344 bps to 142 bps over the same period. Even for the lowest investment-grade bonds (BBB-), spreads had come down by 125 bps, as of July 31.

However, these pertain mainly to primary issuances. Bond dealers say trading activities in the secondary market have not revived much, and investors are buying bonds with the knowledge that they may not be able to rake in much profit in times of need, thus clearing the path for yield-chasing private investors.