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There is an interesting trend emerging from the recent debenture issuances. The issuing companies are coming out with better rates than the previous ones.

Manappuram NCD

Even as investors are queuing up for long-term debt options, the 400-day secured non-convertible debenture (NCD) from Manappuram General Finance (Manappuram) can be considered. The cumulative option which has a yield-to-maturity of 12 per cent despite carrying some risk, is worth investing in, as the near term business outlook continues to be encouraging for Manappuram.

Manappuram, being concentrated on the gold lending business, is exposed to gold price volatility. Yet, it has good net interest margins. The outlook for gold prices, a key determinant of prospects for gold lending, appears stable after the recent economic events. In any case, a low loan to value on gold loans, also provides some buffer to gold loan companies against a correction in gold prices.

Strong capital adequacy levels of 21.8 per cent also gives some confidence in the investment. The credit rating of CARE AA- is however, one notch lower to that of Shriram City Union Finance which makes it slightly more risky.

THE ISSUE

The 400-day deposit rates of banks offer rates that are at least 1.5 percentage points lower than this debenture, which is to be seen in light of their much safer risk profile. Lakshmi Vilas Bank and City Union Bank offer 10.5 per cent and 10.4 per cent interest rates for a 400-day deposit.

Investors who plan to invest with a two year perspective can, however, give this offer a skip for now. The company's main competitor Muthoot Finance, is also coming up with a two year option in its upcoming issue.

ABOUT THE COMPANY

Manappuram General Finance has a branch network of 2,280 with three fourth of the branches in the South. The gold financing accounts for 99.2 per cent of the loan book (Rs 8915 crore as of June 2011). The interest spread for the year ended March 2011 was very high at 16 per cent. The Net NPA at 0.3 per cent also gives some comfort. The Rs 750 crore issue (with Rs 350 crore oversubscription) opens on August 18 2011 and closes on September 5 2011. However, the issue could be pre-closed if it gets oversubscribed before the closing date.

Shriram City Union Finance

Investors can subscribe to the Shriram City Union Finance's public offer of three-year secured NCD.

Shriram City's three-year NCD option offers an annual interest payout at 11.85 per cent for investments of less than Rs 5 lakh. The rate is 11.6 per cent for other individuals.

ATTRACTIVE RATES

The 11.85 per cent three-year option is attractive vis-à-vis bank deposits. The average bank deposit rate of banks is close to 9 per cent for three-year maturity. While not strictly not comparable, the spread between the NCD issue and bank deposit rates, in excess of 2.8 percentage points, more than compensates for the marginally higher risks.

Apart from investment grade rating, the company's established track record and expectation of interest rates nearing the peak also make the offer attractive. The yields on similar (CARE AA) rated instruments issued by Non-Banking Finance Companies (NBFCs) in the secondary market are close to 10.1 per cent.

ABOUT THE COMPANY

Shriram City Union is a diversified retail financing NBFC which is predominantly engaged in financing small and medium enterprise (SME) loans, loan against gold and auto financing. The company operates through 650 point of presence with high concentration in Andhra Pradesh and Tamil Nadu.

For the quarter ended June 2011, the net profit was Rs 80 crore and the interest spreads were in excess of 11.6 per cent. It has a loan book size Rs 8,005 crore on the book. The net NPA to a low 0.44 per cent. The capital adequacy ratio too was at a comfortable 20.13 per cent.

ISSUE DETAILS

The issue has a minimum investment amount of Rs 10,000. The offer opened on August 11 and closes on August 27; with an option to pre-close the issue. The allotment is on a first-come-first-serve basis. NCDs will be listed on both BSE and NSE