A corporate debt instrument that pays interest and repays principal at maturity, and carries no right to convert into equity.
Abbreviated NCD. It is the dominant instrument of the Indian corporate bond market, and the most commonly rated instrument after bank facilities.
The main distinctions
Secured or unsecured. A secured NCD carries a charge on specified assets of the issuer, created in favour of a debenture trustee. An unsecured NCD does not, and ranks with the issuer’s other unsecured obligations. The distinction is material to recovery and is stated in the rating document.
Public issue or private placement. A public issue is offered to investors at large under SEBI’s issue-and-listing framework. A private placement goes to a limited set of identified investors. Most Indian NCD issuance by value is privately placed, and much of it is subsequently listed.
Listed or unlisted. Listing brings continuing disclosure obligations to the exchange, including disclosure of rating actions on the instrument.
The rating
An NCD is rated on the long-term scale — AAA down to D, with + and − modifiers from AA through C — and carries a rating outlook.
Suffixes matter here more than on most instruments. An NCD rating may carry (CE) where an external support such as a guarantee or shortfall undertaking lifts it above the issuer’s standalone level, or (SO) where the obligation rests on a defined transaction structure. It may be assigned as a provisional rating ahead of documentation being executed and converted once it is.
Ratings on NCDs are also the ones most likely to be assigned by more than one agency, since investors and mandates often require two.
How it differs from a bank loan rating
An NCD rating serves investors deciding whether to buy paper. A bank loan rating serves the lending bank and its regulator, for capital computation.
That difference has a direct consequence for what the document contains. An NCD rating release has no counterparty to name — there is no single lender behind a placed instrument. A bank loan rating release, by contrast, frequently appends a lender-wise annexure naming the bank behind each rated facility. If you are looking for banking relationships in rating documents, they are in the bank loan ratings, not the NCD ratings.
Related
- Bank loan rating — the other side of the rating universe, and where lenders are named
- Commercial paper — the short-term instrument alongside it
- Credit enhancement — the (CE) suffix an NCD rating may carry
- How to read a rating press release
- Glossary index