Don’t blindly rely on credit scores when investing in NCD issues


Debt investing is not about yield, but about capital protection. Therefore, it is very important that investors fully understand the risks before investing any money in various debt instruments.

Non-convertible debentures, or NCDs, which are used by companies to raise capital, are one such financial instrument, where people invest to receive regular interest at a certain rate for a fixed term.

To judge the quality of an NTM problem, the most widely used tool is the credit rating, which is issued by rating agencies. Usually, AAA rated issues are considered the safest. Additionally, experts suggest that retail investors should not embark on issues rated below AA / AA +.

However, there have been instances where questions have been raised about the credit rating agencies themselves.

mint reported on Tuesday that the market regulator, the Securities and Exchange Board of India (Sebi), could revoke the license of the rating agency Brickwork Ratings due to the lack of independence of the rating committee and lapses in the procedures followed when scoring instruments (read here).

So what should investors do when reviewing credit rating to invest in MNT issues.

According to Nishith Baldevdas, founder of Shree Financial and investment advisor registered by Sebi, the first thing investors should keep in mind is that ratings are the opinion of rating agencies and not the absolute guarantee of the performance of the company. business.

“In the past, shows that were even rated AAA, such as DHFL and IL&FS, were lacking. Investors in such problems later realized that they would not get their investment back 100%, ”said Baldevdas, who does not recommend investing in NTMs.

According to the financial advisor, the best judge of an NCD problem could be the quality of the company, the sound management and the diversification of the company.

“If it is a large conglomerate with good corporate governance and well diversified activities, then the risk factor is automatically reduced. Because if a business fails, then the owner’s credibility is at stake, so he or she will seek to settle investor money by liquidating other verticals or taking loans from other entities, ”Baldevdas added. .

Harshad Chetanwala, a registered investment adviser by Sebi and co-founder of MyWealthGrowth, believes credit ratings are important as they give you an idea of ​​the quality of the issue.

“However, there have been times when there was no synchronization between ratings and the behavior of organizations, and there has always been a question about the spirit behind how ratings are done. investors and individuals need a solid source on the outlook for the business, ”he said.

Chetanwala suggests that investors shouldn’t get carried away by the current rating and look at the historic rating for the past two years. This provides insight into the performance of the business over the years.

In addition to reviewing ratings (AAA, AA, etc.), investors should also consider the outlook for the company according to rating agencies. In general, a “stable” outlook means a low probability of a rating change in the short to medium term, while a “negative” outlook indicates a high probability of a downgrade in the short to medium term. term. A constant negative outlook could be a harbinger.

Moreover, besides reviewing the credit profile of the NCD issuer, investors should also check the quality of the credit rating agency itself.

“There are a few reputable and established credit rating agencies such as Icra Ltd, Care Ltd and Crisil Ltd in India that investors should rely on. However, the research should be done either by the advisor or by the investor. The key factor is that investors should not blindly rely on the agency’s current rating when investing in NTMs, ”said Chetanwala.

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