Secured Bonds

Secured bonds in India

Secured bonds are bonds backed by a specific asset(s) owned by the bond issuer. The asset is a recourse for the bond investors in the event of default by the bond issuer. 

For example - A company may issue Bonds backed by one of their factories. In case of issuer bankruptcy or default, investors can sell the factory that secured the bond to recover their money. The trustee of the bond (appointed during the bond issue) does the recovery on behalf of the bond holders.

What are senior secured bonds?

Every company has a capital structure for their debt. Seniority of debt decides which debt of the company gets paid first. 

Senior secured is the most senior debt of any company and senior secured bondholders get paid first. Hence, it is considered to be the safest debt of any company. Further, in case of bankruptcy of the issuer, the senior secured bond holders are paid first after the issuer's assets have been sold off by the trustee.

Junior and subordinate are the other and lower seniorities of the capital structure. 

What is the difference between secured and unsecured bonds?

Are secured bonds risk free?

No, secured bonds are not completely risk free. However, they have a lower risk than Unsecured Bondss.

Issuers of secured bonds

Only corporations or companies (both private sector and PSUs) issue secured bonds.

Government Bonds are always unsecured because of their sovereign credit rating and investor confidence.

Examples of Secured Bonds

Who should invest in secured bonds?

Investors who value safety in investing should consider buying secured bonds. Secured bonds can help investors to protect their capital and generate stable and regular income.

Risks of investing in secured bonds

The biggest risk of investing in a secured bond is when the issuer defaults and the value of the collateral backing the bond falls below the market value. In such cases, investors will probably recover only a fraction of their investments.

Apart from this, secured bonds are subject to risks related to interest rate, reinvestment of coupon, liquidity and credit default. Holding a secured bond until maturity will help you eliminate interest rate and liquidity risks.

Advantages of investing in secured bonds

The biggest advantage of investing in secured bonds is that added safety due to the presence of collateral. In case of default or bankruptcy, investors are aided by the trustee of the bond and they can fully recover their money.

Capital protection and regular interest payments are some more advantages of investing in secured bonds.

Best Secured Bonds in India

Identifying the best secured bonds for you requires some filtering.

First, you need to decide what credit rating you are comfortable with. If you are an ultra low risk investor, it is better to stick to AAA secured bonds. If you can handle some risk, investing in AA or A secured bonds can be more rewarding to you than AAA secured bonds.

Next, you need to sort the secured bonds in descending order of yield to identify highest yield secured bonds.

Finally, you need to make sure that the maturity date of the shortlisted secured bond is in line with your investment timeframe. This will reduce your chance of selling the bond prematurely. Holding secured bonds until maturity eliminates risks associated with interest rate and liquidity.