Thread by @KirtanShahCFP

Should you invest in the Wint Wealth ‘Covered Bond’ product offering 10.25% for 23 months? This is something that a lot of you’ll have asked me to write on & hence the thread.

Please ’re-tweet’ & help us educate more investors (1/n)

(1) How does a Bank or an NBFC work?

Banks & NBFCs have monies to lend as loans; this lending activity is expected to make them profits (2/n)

(2) But where do they get the monies to lend from?
- Self investment (Equity)
- Investors investing in the company (Equity)
- Borrowed (Debt)
As raising funds through equity may be a limited resource, major business activity depends on the ability to borrow & then lend (3/n)

(3) How do they borrow?

They borrow from the market (Savings account, Current Account, Recurring Deposits, Fixed Deposits/Debentures (NCD) etc) and lend as Personal loan, Housing loan, vehicle loan etc., the difference in the borrowing & lending rate is their income. (4/n)

(4) Any specific difference between Banks & NBFC?

Yes, NBFCs are not allowed to take deposits under savings & current account like banks. NBFCs raise their monies from deposits like FD, but are called Non Convertible Debentures (NCDs). (5/n)

(5) Who lends to NBFCs?

Banks, Mutual Funds, Insurance Companies, Individuals, Corporates all can invest in the deposits that NBFCs come out with. You see Bajaj Finance coming out with deposits right? Same thing. (6/n)

So lets say, an NBFC has 100 rupees, 20 self & other investors & 80 borrowed from the market as a loan for 3 years. Lets theoretically assume, the entire 100 is lent in housing loan to someone for 15 years & every month the NBFC will receive the EMIs (7/n)

(6) So will the NBFC not do any new lending for 15 years?

No they will. They will be receiving the EMIs, which can be lent further, and also they can keep borrowing more money from the market and pay off the older loans & keep giving out more new loans. (8/n)

(7) What’s the risk to the business?

If there r a lot of NPAs or the NBFC is nt able 2 raise money periodically, the rotation of money may stop, creating de-growth in the business or even defaults bcoz of the mismatch of the funds (borrowed for 3 years $ lent for 15 years)(9/n)

(8) What are the types of NBFC deposits?

(a) Unsecured/Normal deposit – When you give money to the NBFC, NBFC promises you a certain interest and return of principal in a couple of years. If they default, you may lose your investments (10/n)

(b) Secured Deposits – Some existing loans (housing, vehicle etc) that the NBFC has already given out & has received some mortgage (House, Vehicle) against it r kept as security for raising new Debt but issuing bonds. (11/n)

(b) Secured Deposits (continue) - If the NBFC is not able to pay back to these new lenders, the EMIs received from the loans kept as security, mortgage kept for the loan should be used up to pay the deposit holders. (12/n)

(b) But this security would become part of bankruptcy proceedings which may take time (DHFL Bond holders aren’t getting collections that are coming from underlying security in secured deposits)(13/n)

(b) Also, if after selling everything that was kept as security/mortgage, you still can’t recover your dues, the pending amount may default (14/n)

(c) Covered Bond – Works exactly like secured deposits with an added advantage, that underlying security is bankruptcy remote i.e. collections from the underlying pool will directly go to the investors and form part of bankruptcy proceedings. (15/n)

(c) Covered bond (continued) - If the security/mortgage is not enough for the dues of deposit holders, the company is still liable to pay you the remaining dues. So in the bankruptcy proceedings, cover bond investors will receive some investments back (16/n)

(10) What & How of the Wint Wealth covered bond offer?
- The borrowing NBFC is Kogta Financial
- This covered bond is for 23 months
- Interest paid monthly & principal at maturity
- Interest is taxed at slab rates (17/n)

-Borrowing 20 cr, 4 which they r keeping 24.6 cr of existing vehicle loans & cash as mortgage. So on default (if ny by Kogta), the EMIs & vehicles kept as a security is what is available 2 the investors along with becoming a part of the lenders in the bankruptcy proceeding(18/n)

Advantage here is that the NBFC will have to keep adding more loans as security over a period of time to replenish, which is expected to increase the vehicle collateral to roughly 37 cr. They have explained it well here - wintwealth.medium.com/growfix-wheels… (19/n)

(11) Risks in investing
- Kogta is not a very established NBFC
- Rating of the NBFC is A- by CARE. There is credit risk at the NBFC level. Rating of the bond is AA because of the security kept.
- Vehicle loan security is not as superior as Gold or Real Estate (20/n)

- Loan has a geographical risk with 75% loans given in 3 states
- Loan to value is average 73.13% with some even at 90%
- Liquidity risk, if you want your investment back before maturity, it can be tricky. Though it’s a BSE listed bond, I doubt there is secondary market liquidity

- These loans are only 1 month old and hence no clarity on the borrowers credit profile (22/n)

(12) Positives
- Covered bond is a superior structure but it only comes into picture after Kogta defaults. So the first level of defense is Kogta continuing to run the business successfully
- NBFC level Net NPA is low – 2.1% (23/n)

- Vehicle collateral value keeps increasing (32 - 37 cr.) against the same 20 cr. borrowing
- Tenure is low
- Axis MF has recently added Kogta’s bonds in their strategic Bond fund & credit risk fund & hence an Institutional investor has also shown confidence (24/n)

- Morgan Stanley & IIFL are equity investors
- Surprising but Wint wealth has kept 4cr. as a reserve, for pre-maturity. Not sure if it’s a great strategy though (25/n)

(13) Suggestion
- Such investments r commonly offered by wealth desks to HNIs. The new thing is this is for retail, which can be a double-edged sword. Normally retail don’t get such products to invest in but understanding the risk return before investing is as important (26/n)

- The bond has credit risk; don’t buy it as an FD replacement
- If you are an aggressive investors, this can form part of your tactical portfolio in debt upto 5% (27/n)

This is a sponsored educational thread. The writing is completely unadulterated (hence I chose to write it) and purely my view alone. The full sponsorship amount is going to be used for COVID related donations. (28/29)

I have written multiple threads earlier on
– Sector Analysis
- Macro Economics
- Debt Markets
- Real Estate
- Equity Markets etc.

You can find them all in the link below. (**END**)

https://twitter.com/KirtanShahCFP/status/1337953717274832896?s=20

Our Youtube – youtube.com/c/KirtanAShah