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Wednesday, August 3, 2016

DHFL NCDs issue - should or shouldn't buy - NCD review

View: Neutral NCD issue review

DHFL NCD Issue opens on Aug 3, 2016, closes on August 16, 2016

Should or should not buy? What to look at? Is it safe? Will it give high returns? What are the risk involved?

About the company - #DHFL, is a deposit-taking housing finance company registered with the NHB and focused on providing financing products for the #LMI (Lower Middle Income) segment in India primarily in Tier II and Tier III cities and towns since 1984. They are known for providing secured finance primarily to individuals, partnership firms and companies for the purchase, self-construction, improvement and extension of homes, new and resalable flats, commercial properties and land. They also provide certain categories of non-housing loans including loans for commercial property, medical equipment, and for plant and machinery.

About the issue

DHFL, NCD issue opens on August 3, 2016, a public issue of secured redeemable #Non-Convertible Debentures (“NCD”) of face value of Rs. 1,000 each aggregating up to Rs. 4,000 crore. The Issue is scheduled to close on August 16, 2016, with an option of early closure or extension as decided by the Board of Directors of our Company (“Board”) or the Finance Committee.

The NCDs received the highest credit rating ‘CARE AAA (Triple A)’ by Credit Analysis and Research Limited (“CARE”) BWR AAA (Pronounced as BWR Triple A) by Brickwork Ratings India Private Limited (“Brickwork”). The rating of CARE AAA by CARE and BWR AAA, Outlook: Stable by Brickwork indicates that instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations signifying the instrument carries lowest credit risk.

·         The minimum application amount is Rs. 10,000 collectively across all options on NCDs and in multiples of One (1) NCD after the minimum application. Maximum limit of a retail investor is Rs. 10 lakh.

·         Allotment is on a first-come-first-serve basis (except on the date of oversubscription, if any, when all the investors applying on the said date will get allotment on a proportionate basis).
·         Investors have an option to apply for NCDs in dematerialized as well as physical form
·         Category IV Investors (Retail Individual Investors) are defined as Resident Indian individuals and HUFs allowing investment upto 10 lakh
·         Investors can apply through ASBA, the NCDs are available both in physical and Demat format
Issue Structure
The issue is divided into 10 series depending on the tenure of the series and coupon payment. And divided into 4 categories – category I, II, III, IV.
  •  Interest on Application Money is at 8.00% p.a. and Interest on Refunded Money is at 6.00% p.a
  • Tenure of the NCDs are 3, 5 and 10
  • Coupon payment options – monthly, quarterly and annually
  • The interest payout metho includes NEFT, RTGS, Direct debit
  • Floor rate on interest rate for all categories is 8.90% and cap on interest rate for all categories is 9.50%.
  • Series X is a Consumer Price Index (CPI) linked instrument (Floating Rate Instrument) has a tenor of 3 years and the Coupon Rate for Category I & II investors is currently 9.10% (Reference CPI + 4.08%); and that for Category III and Category IV investors is currently 9.20% (Reference CPI + 4.18%). 12 month average for the period before the record date (currently at 5.02%; Source  

Allotment is first come first served basis

Issue size and allocation
QIB: Rs. 800 Crore
Corp: Rs. Rs. 800 Crore
HNI: Rs. 1200 crore
Individual: 1200 crore
Total : 4000 crore

Interest rate:
For individuals
9.20% p.a for 3 years
9.25% p.a for 5 years
9.30% p.a for 10 years

For Non-individual
9.10% p.a for 3 years
9.10% p.a for 5 years
9.10% p.a for 10 years

#NRI investors cannot invest in this issue

My Take – #NCDs are being offered by reputed housing finance player, having a minimum investment requirement of Rs. 10, 000. The NCDs are secured, backed by assets, which means incase of default/ non-payment, assets can be liquidated to repay the debts. Credit rating agencies CARE and BWR has awarded highest credit ratings, suggesting lowest risk involved.  So, safety score is high for the principle amount.

Now let us look at the interest rate and coupon payment scenario. The #coupon rate across segment is expected to be just above 1.5- 2 % from any bank FDs at this point of time. Though the dematerialised NCDs don’t attract TDS, the investment will taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor. So, with a high tax bracket investor (20-30%) won’t be benefited much, as the return will be almost similar to Bank FDs.
However, interest rate movement can be a game changer in this investment. Apart from the coupon payment, capital appreciation on principal is possible incase interest rates soften during the tenure of the NCDs. The interest rate and bond prices move in opposite direction and one can sell it at a profit, instead of holding on till maturity. The scenario exactly can become opposite in case of rising interest environment, the prices of the instrument may fall sometimes even below the face value in some rare cases. For the investors in lower tax bracket, instrument offers higher interest rate than bank with minimum risk, may also enjoy capital appreciation incase interest rates fall.

General Risks –
  •         #DHFL’s Business is particularly vulnerable to volatility in interest rates
  •     Any increase in the levels of non-performing assets in loan portfolio, for any reason whatsoever, would adversely affect the business, results of operations and financial condition
  •     Any downgrade in their credit ratings may increase interest rates for refinancing their outstanding debt, which would increase their financing costs, and adversely affect our future issuances of debt and our ability to borrow on a competitive basis.

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