Who issues Senior Secured Bonds?
Typically, big corporations in India issue these bonds to source funds from the market. Non-Banking Financial Companies (NBFCs) also issue senior secured bonds to avail borrowings from the public as these are a nice way to get funds apart from mainstream lenders such as Banks. NBFCs are one of the major issuers of bonds in the Indian debt capital market.
How do Senior Secured Bonds work?
The bonds are one of the debt instruments by which the issuer company raises money from the public and pays interest/ coupon amount to the investor. They issue the bond for a specific tenure and then by the maturity of the bond, pay the principal back.
Senior secured bonds are superior when compared to unsecured bonds and subordinated bonds. Hence, at the time of liquidation, these bondholders will get priority in getting the payment.
The issuer pays interest and principal based on the terms and conditions of the bond, which is agreed by the issuer at the time of issuance only. It can be monthly, quarterly, semi-annually or annually as per the agreement.
What are the features of Senior Secured Bonds
- Senior secured bonds are a safer option than most bonds.
- These secured bonds will be backed by some kind of collateral or the company's assets, such as property, inventory, receivables, etc.
- At the time of liquidation, the bondholder of the senior secured bond will get priority over other investment holders.
- Credit rating agencies rate these bonds. So, it becomes easier for the investor to choose the investment option considering the rating assigned by the rating agency.
- Investment in these bonds can be done from Rs 1000, and the minimum investment amount can range from Rs 10,000 to Rs 1 Lakh based on the terms of such issuance.
Advantages of Senior Secured Bonds
- Senior secured bonds are a safer option as they are backed by collateral.
- These bonds are safer than equity investments as these have fixed coupon payments on the agreed date.
- As these bonds usually have an amortisation structure, hence provide regular/periodic income to the investor and are good for people looking for a recurring source of income.
- These bonds are good for people who want to diversify their portfolio with moderate risk.
Disadvantages of Senior Secured Bonds
- These bonds are not easily transferable/ redeemable hence they have low liquidity making them less lucrative in case of any sudden need for funds.
- There will always be credit risk involved with the bonds. If the issuer fails to maintain the quality of the loan hypothecated, there is a chance that they will make a default also in making timely payments.
- The risk is lesser in senior secured bonds, so that the return will be slightly lower than in unsecured investment options.
How to calculate the yield of Senior Secured Bonds
Yield is the return on the capital the investor has invested in the bond. The yield and price of the bond are inversely related to each other, i.e. with the rise in the bond's price, the yield will go down and vice versa.
To know the actual return earned on a bond, we need to calculate the XIRR, i.e. Extended Internal Rate of Return of the bond.
What is XIRR?
An extended Internal Rate of Return is a rate of return that gives the actual or current value of the total amount invested. It gives the average annual rate of return that an investment can generate over a period of time.
Let's understand this by an example,
Purchase price of senior secured bond on 1 Jan 23: ₹ 20,000/-
The coupon rate is 8%
Semi-annual coupon payment
The bond will mature in 4 years
Coupon Payments will be
Year 1
- 800
- 800
Year 2
- 800
- 800
Year 3
- 800
- 800
Year 4
- 800
- (20,000+800)
Calculation of XIRR= XIRR(B1:B9,A1:A9)*100
| S.No | Date (A) | Cash Flow(B) |
| 1 | 01/01/23 | (20,000) |
| 2 | 01/07/23 | 800 |
| 3 | 01/01/24 | 800 |
| 4 | 01/07/24 | 800 |
| 5 | 01/01/25 | 800 |
| 6 | 01/07/25 | 800 |
| 7 | 01/01/26 | 800 |
| 8 | 01/07/26 | 800 |
| 9 | 01/01/27 | 20,800 |
| XIRR | 8.15% |
(Note: This is calculated using excel sheet, if you put this formula in excel sheet then the result would be same)
Who should invest in Senior Secured Bonds
Investors looking for exposure to the market can consider investing in senior secured bonds. This is because such bonds offer stability and income, which are two key factors to look for when making an investment decision. Also, Investors who are looking for an alternative to traditional fixed-income instruments can also consider senior secured bonds. This is because such bonds offer higher interest rates than government bonds and fixed deposits and are less risky than equity investments and unsecured bonds.
Finally, investors who want to diversify their portfolios can also consider investing in such bonds.
