Market-linked Debenture Issuances at All-time High, says CARE Ratings

Moneylife Digital Team 06 March 2019

Investor Interest

Non-banking finance companies (NBFCs) and corporates have resorted to structured deals to raise long-term funds, says CARE Ratings.

According to the note, structured notes market witnessed recovery in growth of issuances in the nine-months ended 31 December 2018 (9MFY19) after an accentuated drop in the last fiscal. The net outstanding structured notes grew to Rs21,191 crore as on 31 December 2018, from a low of Rs11,356 crore in September 2017.

The aftermath of the Infrastructure Leasing & Financial Services crisis dried out liquidity for most NBFCs and housing finance companies (HFCs). “To reduce higher dependence for short term funding from institutions such as mutual funds, NBFCs are raising capital through structured debt like Market-linked Debentures. Growth in new issuances of MLDs in the 9MFY19 stood at Rs12,190 crore vis-à-vis Rs7,365 crore in FY2017-18,” CARE Ratings says.

Market linked debentures (MLDs), also known as equity-linked debentures, do not offer a fixed payoff like conventional debentures but their returns are linked to an underlying security or index. Issuing debt through structured products like MLDs enables the issuer to raise more funds while complying regulatory guidelines and norms, diversifies their borrowing profile and offers bullet payment as against monthly or annual coupon payments.

MLDs come in different types and offer nuances in their payoffs as well. According to CARE Ratings, investors have shown higher inclination toward MLDs that offer principal protection. “About 95% of the total issuances in 9MFY19 comprised of principal-protected MLDs. The tenure of MLDs ranges between 13 months to 60 months; the average maturity of MLDs issued in 9MFY19 stood at 2.85 years. The favourite underlying security/index in MLDs has been the barometer index Nifty of the National Stock Exchange (NSE),” it added.

Although MLD returns are market-linked, investors preferred fixed-coupon structures in these to other options. The share of MLDs with fixed-coupon payoff was 86% in the nine-months of FY2018-19 as against 20%-30% three-four years ago.

CARE Ratings says it expects MLD issuances to touch Rs14,000 crore mark in the FY201819 as companies continue to face tight liquidity due to the IL&FS crisis.

Terms like derivatives, paired trades and equity-linked debentures, among others, have enticed a lot of investors into investing in these products. A strong marketing pitch by fund houses combined with fancy terms or investment strategies leads them to believe that structured products are superior and investors are dumb if they don't get into such complex ideas yielding higher profits.

However, according to CARE Ratings there are certain elements that investors need to consider before investing in structured products. Some of the structured products claim to perform across market conditions.

Investments in instruments like structured products should be made only after there is a clear understanding of its investment proposition, risks involved and the returns projected. If the investor can unravel the structure and can take on the risk for that additional return, then he can consider investing in them.

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