I saw a notification about a bond IPO from a large NBFC. I understand equity IPOs where you buy shares of a company. But what is a bond IPO? Is the process the same? And should I apply to one if I see it?
A bond IPO, more formally called a public issue of NCDs, is when a company raises debt from the public by issuing bonds directly to retail and other investors through the exchange platform. It is the bond equivalent of a primary equity offering.
The process looks similar to an equity IPO: a subscription window opens, you apply during that window, funds are blocked, allotment happens after the issue closes, and the bonds appear in your demat. But there are important differences.
what are the key differences from an equity IPO
Three main ones.
First, what you are buying. In an equity IPO you buy ownership of the company. In a bond IPO you are lending money to the company. Very different rights.
Second, listing and return. An equity IPO share price can double or go to zero after listing. A bond IPO pays a fixed coupon and returns face value at maturity. The upside is limited but so is the downside, assuming the company does not default.
Third, competition for allotment. Equity IPOs are often oversubscribed many times over. Bond IPOs rarely have that frenzy. If you apply to most bond IPOs within the window you typically get allotted in full.
so bond IPO is boring compared to equity IPO. no listing pop, no fomo, just steady coupon payments. but also no chance of blowing up
Boring in exactly the right way. For someone who wants predictable income rather than speculative returns, a bond IPO from a well-rated issuer is a cleaner transaction than the secondary market because you pay face value with zero accrued interest since you are buying from day one.
what should I actually check before applying to a bond IPO then. like what makes one worth applying versus skipping
Five things.
One: Credit rating and which agency assigned it.
Two: Secured or unsecured. Secured is preferable all else equal.
Three: Coupon rate relative to what similar-rated bonds yield in secondary market. If the IPO yield is lower than secondary market equivalent, the secondary market is better value.
Four: Tenure and whether it matches your investment horizon.
Five: The promoter’s track record and whether the company has previously defaulted on any obligations.
If all five check out, applying makes sense. If the yield is below market for the same credit quality, skip it and buy in secondary.
this is exactly what I needed. bond IPO is simpler and less exciting than equity IPO but that is the point. going to read the prospectus of this one before deciding. thank you.