Who is Right on Shriram Transport Finance Bonds, Retail, or Institutional Investors?
 

The bonds issued by Shriram Transport Finance Limited (STFL) offer very high yields in the bond market with yields of over 10% and going up to even 13%. The yields are very attractive given that the bonds are rated AA+, which is just one rung below highest safety rating of AAA. In fact, at such yields, the bonds are being treated like BBB bonds, which is just one rung above junk bond yields.

  Arjun Parthasarathy

SEARCH FOR YIELDS Issue 5, November 7th

Shriram Transport Finance Bonds offer very high yields compared to its peers

The bonds issued by Shriram Transport Finance Limited (STFL) offer very high yields in the bond market with yields of over 10% and going up to even 13%. The yields are very attractive given that the bonds are rated AA+, which is just one rung below highest safety rating of AAA. In fact, at such yields, the bonds are being treated like BBB bonds, which is just one rung above junk bond yields.

STFL peers in the commercial vehicle lending sector are trading at yields ranging from below 6%, Sundaram Finance to 8% and 9%, Cholamandalam Finance. Even Tata Motors Finance rated A- for perpetual bonds, issued 10-year bond at 9.75% recently.

Why is STFL trading at yields far above its peers?

The bond market decides the yields of bonds and various factors come into play. These factors include demand-supply and perception of risk. Clearly bond market perception of risk of STFL bonds is way higher than rating agencies perception of the bonds as seen by the very high safety ratings. However, as seen in IL&FS, DHFL and other very high rated bonds that defaulted, ratings follow bond markets with a huge lag and not the other way round. 

Equity market also validates the bond market with STFL equity value dropping substantially from highs. 

STFL is facing challenges in its Commercial Vehicle lending business due to COVID-19 and general economic downturn earlier but is supported by strong capital adequacy, which indicates that it can withstand some shocks. But the bond market is not buying into the capital adequacy theory and investors should always keep an eye out for bond market views.

Retail Investors are investing in STFL bonds, for its high yields�

STFL is seeing good trading in terms of frequency of trades in the market, largely driven by retail investors. Mutual Funds have stopped investing in STFL bonds. Retail investors are willing to buy the risk spread available on STFL bonds. The question is, will they be rewarded with the high returns offered by the bonds or will they see capital loss in case of further deterioration in risk of the bond? Time will tell.

INRBonds gives you the credit report, fair yield, risk score and liquidity on STFL bonds.�


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