Secured Bond V/s Covered Bond: How Are They Different?

There are 2 types of basic structures in a bond:

  • Secured bond;
  • Unsecured bond.

Simply said, a secured bond is a bond that is backed by collateral. This collateral can be in the form of gold loans, vehicles loans, property loans etc.

But how is this asset class beneficial for investors?

In case the NBFC defaults on its payments to bondholders, the assigned collateral can be used to recover the investor’s money.

While in an unsecured structure, the bonds are issued by an entity without the backing of any security/collateral. In case the entity defaults, there are high chances that bondholders will not be able to recover their money. 

types-bonds

Now that you have understood the basic difference between secured and unsecured bonds, let’s dive deeper into the different types of secured bond structures.

Senior Secured Bond V/s Covered Bond


In covered bonds, the pool of loans that were provided by the NBFC as collateral is moved to a special purpose vehicle (SPV) set up in the form of a trust.

Since the collateral is moved to the SPV, the NBFC is no longer the owner of the collateral. Now, in case the NBFC defaults and is unable to pay money to the investors, bondholders have the option to recover their dues from the collateral which was moved to the SPV. 

However, In the month of September 2021, RBI came up with a change in the regulation that affected the way covered bonds were structured.

What about senior secured bonds?


In case of senior secured bonds, the pool of loans which is provided by the NBFC will remain on the books of the NBFC itself. And in case of a default, the pool of loans will be part of the bankruptcy proceedings, because the collateral will still be on the books of the NBFC.

However since these bonds are senior in nature, these bondholders enjoy the senior-most priority to get repaid in case the NBFC defaults.

The below diagram shows the basic comparison between all the different types of bonds that we have discussed till now:

Screenshot 2021 11 17 at 2.12.52 PM

What About Wint Wealth’s Assets? 

Wint Wealth will continue to bring assets that are backed by collateral, however, the structure would be of a senior secured bond. These senior secured bonds have their own characteristics which are different from other secured bonds. 

There are 3 major features through which Wint Wealth has tried to reduce risk in Wint Bricks Nov21:

Features Wint Bricks Nov21 Other Secured bonds
Reduction in credit risk Partial repayment of principal every 9 months increases the chance of not losing your entire investment (in rare cases if the NBFC defaults). The majority of senior secured bonds in the market have a bullet repayment structure and hence pay principal at maturity which carries high credit risk, as the entire principal can be lost in case the NBFC defaults.
Over collateralisation Wint Bricks Nov21 is backed by a pool of property loans, which is 1.25X of the bond value. This provides a steady cushion to bondholders in case of bankruptcy. The over collateralisation feature is rarely available in other secured bonds. In most cases, the collateral value is equal to the value of the bond.

Although we have tried reducing risks via structuring and due diligence, these assets still carry a fair amount of risks.

To understand the bankruptcy proceedings in the case of senior secured bonds,  we have done a detailed blog on what happens to secured bondholders in case the NBFC defaults at the below link: https://www.wintwealth.com/blog/secured-bond-holders-bankrupt/

Happy Winting!

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