Guided Investing





Fixed Income Investing Opportunity

Category : Asset Allocation, Fixed Income · by Oct 7th, 2018

The flurry of activity witnessed in the corporate bond market last fortnight has resulted in a sort of domino effect in the entire fixed income market. This unexpected chain of events has opened up opportunities for retail investors to capitalize in the fixed income market. I am presenting one such actionable investment opportunity here:

L&T Finance Ltd, a group company of Larsen and Toubro Ltd., had issued Non-Convertible Debentures (NCD or bonds) in Sep 2009. The issue size was 1,000 Cr and the maturity were for a period of 10 years. Subsequently in Aug-2016, company had initiated a buy-back program and redeemed some of the bonds. Reported outstanding bonds as on Oct-2017 are 459.56 Cr. I believe the outstanding position should not change from Oct-2017 till today.

The coupon rate is 10.24% and the bonds are available at about Rs.1,006 (as on 5-Oct-2018). At these prices, the yield works out to be more than 11%. Very juicy yields for a high-quality bond.

This is how the receivables will work out to be:

  1. These bonds pay half yearly interest. Next interest payout is due on 17-Mar 2019 – works out at Rs.51.20 per bond;
  2. These bonds will be redeemed on 17-Sep-2019 and the bondholder will receive another Rs.1051.20 as maturity proceeds.

Risks:

  • Credit Risk: ICRA has assigned a rating of AA+ on 11-Oct-2017 and the rating stands at the time of writing this. This is very high rating.
  • Interest Rate Risk: Not applicable as these will be redeemed in less than 1 year
  • Liquidity Risk: Outstanding bonds are Rs.459.56Cr. The company has sufficient liquidity to cover this bond’s maturity

Taxation: There can be two modes of income from these bonds. Scenario 1) if the bondholder holds the bonds to maturity and receives interest payouts or the maturity proceeds or scenario 2) if the bondholder were to sell the bonds in the secondary market. In scenario 1) the income received will be interest income. In scenario 2) the income will be Short Term Capital Gain. In both the cases the income received will be added to the total income and taxed according to the slab. Hence it does not make much difference to the bondholder if they hold till maturity or sell if they are getting a good price for it.

Considering all the points above, I recommend we buy these bonds from the secondary market with a time horizon of little less than one year. The maximum exposure to this issue should be according to one’s risk appetite but I will suggest no more than 5% of networth.

A point to note: If need be, these bonds can be pledged easily and can be used as collateral.

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