As interest rates creep up, many companies are coming out with non-convertible debentures (NCDs) at relatively higher coupons. Edelweiss Financial Services (EFS) is the latest to raise funds via the NCD route.

Given that the group spans several businesses, investors may have to assess the fortunes of these firms before taking an investment call.

EFS is coming out with NCDs for tenors ranging from 24 months to 120 months. The coupons on offer start from 8.85 per cent and go up to 10.1 per cent. There are monthly, annual and cumulative options for investors. The issue is open till October 17.

Are these rates attractive enough? Here’s what you must know before parting with your money to invest in the NCD issue.

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Many businesses

Edelweiss Financial Services holds several businesses — NBFC (Non-banking Financial Company), Housing Finance, mutual fund, alternative asset management, asset reconstruction, insurance and wealth management.

Here are the key highlights of the key divisions.

NBFC (ECL Ltd)

The group continues to focus on reducing the wholesale loan book and would continue on this path for the next couple of years at least.

  • Gross NPA (non-performing assets) ratio has fallen to 2.76 per cent in June 2022 from 3.96 per cent last year. Net NPA is at 1.93 per cent, down from 3.28 per cent in June 2021. The reduction in NPAs may also have been aided by the reduction in the loan book.
  • The NBFC’s assets under management (AUM) have fallen by 34.6 per cent y-o-yto ₹6,474 crore.
  • Capital adequacy is healthy at 32 per cent.
  • Collection efficiency has increased from 91 per cent last year to 93 per cent in June 2022. There is still scope for considerable improvement on this front.
Housing finance

Housing finance, too, has had a fairly anaemic trend as far as growth in assets is concerned.

  • The AUM declined marginally to ₹4,121 crore in June 2022, from ₹4,165 crore in June 2021.
  • Gross NPA has declined to 1.68 per cent from 3.18 per cent.
  • Collection efficiency has increased sharply to 98 per cent in June 2022 from 93 per cent in the same period last year.
  • Capital adequacy is healthy at 30.9 per cent.
Mutual fund and alternative asset management
  • The AUM for the mutual fund industry grew by a healthy 42 per cent y-o-y to ₹88,000 crore as of June 2022.
  • The AUM for the alternative asset management business grew nearly 20.8 per cent y-o-y to ₹36,250 crore..

The insurance business is not yet profitable, though premiums continue to grow. While the NBFC and housing finance divisions appear to be on the mend, it may be too early to predict a robust revival. Metrics may have to be watched carefully for consistent improvement.

Edelweiss Financial Services is looking to raise ₹200 crore from the issue (with the option to retain another ₹200 crore). At least 75 per cent of the proceeds would be used to repay debt.

What must investors do?

The NCD issue has been rated AA-/Negative by CRISIL. This is a few notches lower than the highest rating. These NCDs carry low credit risk. The minimum investment required is ₹10,000. As indicated earlier, the coupons range from 8.85 per cent (for the 24-month option) to 10.1 per cent (for the 120-month tenor annual payout option).

For the 36-month and 60-month tenors, the coupons are 8.9 per cent and 9.65 per cent, respectively for the monthly interest payouts option.

Data from Citibank (prepared by CRISIL) indicates that yields on corporate bonds that are rated AA- start at 9.92 per cent for six months period, 10.58 per cent for three years, 11.29 per cent for five years and 11.4 per cent for 10 years. These yields are as of September 30, 2022.

Coupons (and therefore the yields) offered by Edelweiss Financial Services NCDs are thus a good 130-160 basis points lower than what bonds with similar rating trade at in the secondary markets.

Given the still slowly improving metrics in the NBFC and housing finance businesses and losses in the insurance vertical, higher coupons may be required. Investors can skip most of the options in the offer, given the relatively lower coupons vis-à-vis other options.

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