A slowdown in demand and stretched working capital cycles have already resulted in an increase in defaults by companies in 2012-13. Recent measures by the Reserve Bank of India to tighten liquidity heighten risk for companies that operate in sectors impacted by the ongoing slump. In such a scenario, investors would do well to avoid instruments rated lower than AAA, such as the non-convertible debentures (NCDs) from Srei Infrastructure Finance.

Srei Infrastructure Finance has come up with a debenture offer, which has been rated AA- by Care and AA by Brickwork. According to the rating definition, instruments with this rating are considered to have a high degree of safety and carry very low credit risk.

The company is offering both cumulative and non-cumulative options on its NCDs. Under the cumulative option, interest earned is compounded and paid on maturity, along with the principal. Under this, investors have a choice of three-year and six-year and three-month tenures.

In the non-cumulative option, the first is for a three-year maturity with annual interest payouts. The second option is for a five-year period with annual interest payout. The third is again for a five-year maturity but with a monthly interest payout.

Lower premium for risk

For ease of comparison, we can look at the cumulative option as they will give higher returns due to compounding. Under this, the three-year option offers 11.51 per cent interest, whereas the six-year and three-month options offer 11.72 per cent interest. The rates are indeed tempting in comparison to bank deposits. The best rate currently offered by some banks for terms of 1-5 years is about 9.5 per cent. AAA rated Mahindra & Mahindra Financial offers 10.25 per cent for a three-year deposit. AA rated deposits from Shriram Transport Finance offers a tad higher 10.75 per cent for a three-year deposit.

However, remember most of the downgrades in ratings by credit agencies in the past have been in lower-rated instruments. Currently, on average, AA bonds offer only 50 basis points more than AAA rated bonds, which is a far cry from the 2 per cent differential during the financial crisis of 2008-09. Thus, it makes sense to invest only in AAA rated companies for now, as lower rated instruments do not offer a sufficient premium for risk.

Besides, on a comparison with the recent NCD offer from Shriram Transport Finance, the Srei Infrastructure NCD offers lower rates. Shriram Transport Finance which launched its NCD in July this year, offered 10.9 per cent for the three-year option and 11.15 for the five-year option. But this was before the recent spike in short-term interest rates on account of RBI’s measures.

Data from Bloomberg shows that yields on AA rated debt instruments have climbed by 140 basis points from July. But Srei Infrastructure’s are only about 60 basis points higher.

Company details

Srei Infrastructure Finance is primarily engaged in financing of infrastructure projects and equipment. The challenging macro environment in the infrastructure financing space has resulted in lower profitability and deteriorating asset quality for the company.

On a standalone basis, the company’s disbursements declined 24 per cent in the June 2013 quarter. The net interest income declined by about 3 per cent due to lower yields and higher cost of funds. The spread (difference between yield and cost of funds) contracted to 2.6 per cent from 3 per cent last year. The power sector has the highest share in the loan portfolio at 36 per cent. The gross non-performing assets (GNPAs) have increased significantly from the March 2013 quarter onwards, when it scaled up to 2.5 per cent from 0.8 per cent of loans in December 2012. As of the June quarter, GNPAs are at 2.4 per cent of loans.

Issue details

The issue size is Rs 100 crore with an option to retain an additional Rs 100 crore. The issue opened on August 26 and closes on September 17, 2013.

>radhika.merwin@thehindu.co.in

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