Should you opt for the 500 cr NCD issue from Edelweiss Financial?

Edelweiss Financial Services Ltd (EFSL) announced the launch of Tranche I of the public offering of Secured Non-Convertible Debentures (NCDs), which offers an effective yield of up to 9.70% per annum.

Many factors such as the economic recovery and payment options work in favor of the problem, experts say, but the rating is a major negative. The nominal value of the NTM problem is ??1000 each, or ??200 crore (basic problem), with an option to keep the oversubscription up to ??300 crore, for a total of ??500 crores. The issue of tranche I will open on December 6 and close on December 27 with an early closing option.

NCDs will be listed on BSE Ltd to provide liquidity to investors.

The proposed NCDs to be issued under this tranche were rated AA- with a negative outlook by the rating agency Crisil Ltd and AA with a negative outlook by Acuity Ratings & Research Ltd.

According to experts, these ratings mean that debentures carry low credit risk but are not as secure as AAA-rated instruments. To judge the quality of an MNT problem, the most widely used tool is the credit rating, which is issued by rating agencies. Usually, issues rated AAA are considered the safest. Additionally, experts suggest that retail investors should not engage in issues rated below AA / AA +. NTMs are used by businesses to raise capital and people invest in them to receive regular interest at a certain rate for a fixed term. There are 10 series of fixed coupon NCDs with a duration of 24 months, 36 months, 60 months and 120 months with the option of annual, monthly and cumulative interest. The effective annual return on MNT ranges from 8.75% to 9.70% per annum.

According to the financial services company, an additional maximum incentive of 0.20% per annum will be offered to all categories of investors, who are also holders of CRS or bonds previously issued by EFSL or its group companies —ECL Finance Ltd, Edelweiss Housing Finance Ltd, Edelweiss Retail Finance SA and Edelweiss Finance & Investments SA.

According to Rushabh Desai, founder of Rupee With Rushabh Investment Services, there are a few factors that work in favor of the credit risk space and this problem.

“First, India’s economic growth momentum is strong. Second, this is a secure NCD issue. Third, this issue offers a variety of payment options as well as the mandate to investors, and the fourth is that since June we’ve seen more business upgrades than downgrades, ”he said.

However, according to the expert, the scoring of the question is a major pain point. “The NCD is rated below AA +. Recently we have seen a new variant of covid appear. We could see a third wave, which could hurt economic strength. Thus, the low credit rating remains the biggest concern. In addition, Edelweiss Financial Services reported a loss of around ??2000 crore in FY20 and an after tax profit of ??250 crore for FY21. So the financial performance remains a bit risky, ”he added.

As an alternative, Desai suggests that if an investor has about five years, he or she can take little risk in the stock market rather than in debt. “The debt market is primarily intended for the protection and preservation of capital and is not intended for growth or earning higher returns or seeking higher returns,” Desai said.

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