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Yield_Premiums_Unsecured_Bonds_India.pptx
- 1. Understanding Yield Premiumson Unsecured Bonds in India • Context: Private Placements & Public Issues
- 2. What is aYield Premium? • - Extra return for holding unsecured vs secured bonds • - Compensates for higher credit risk & lower recovery • - Typically measured as a spread over secured bond yield
- 3. Key Drivers ofYield Premium • Recovery Rate: Lower recovery = Higher spread • Default Probability: Higher PD = Higher spread • Rating Notch Difference: Lower rating = Higher spread • Subordination Level: Lower seniority = Higher spread
- 4. Market Dynamics &Structural Risks • - Liquidity: Less tradability in unsecured bonds increases yield demand • - Investor Base: PFs, insurers prefer secured instruments • - Covenants & Trustee Rights: Stronger protections lower spreads
- 5. Regulatory Impact (IndiaFocus) • - RBI Norms: • • Tier II bonds = subordinated (higher spread) • • AT1 = perpetual, loss-absorbing (much higher spread) • - IBC Recovery Stats: • • Secured: 25–45% • • Unsecured: <10%
- 6. Yield Discovery inPractice • - Merchant banker uses: • • Peer comparables • • Credit rating guidance • • Pre-marketing feedback • - EBP Book-building also reflects investor yield expectations
- 7. Case Example –L&T Finance • Instrument: 3Y NCD • Rating: AA+ (Secured) – Yield: 8.10% • Rating: AA (Unsecured) – Yield: 8.60% • Spread: 50 bps
- 8. Summary • - Yieldpremiums are multi-factor decisions • - Balancing credit risk, recovery potential, structure, and demand • - Critical for issuers and merchant bankers to align pricing with market perception