ET Alpha Wealth Summit 2.0: Structured debt and the search for higher yields

High-net-worth individuals (HNIs) and family offices are increasingly looking beyond traditional fixed-income products in their search for superior returns, turning their attention to the complex world of structured debt. These instruments, which can offer yields between 10% and 14%, are gaining traction as a potent alternative to low-yielding bank deposits and conventional corporate bonds, according to insights from the ET Alpha Wealth Summit 2.0.

Understanding the Structured Debt Landscape

Structured debt is not a monolithic asset class. It encompasses a range of sophisticated financial products, including market-linked debentures (MLDs), credit-linked notes, and promoter funding instruments. Unlike standard bonds, these are often bespoke arrangements tailored to specific risk and return objectives. They are typically unlisted and require a significant minimum investment, often starting at ₹25 lakh, positioning them exclusively for sophisticated investors with substantial capital and a higher risk tolerance.

The Critical Role of Credit Assessment

The primary allure of structured debt is its high yield, but this comes with correspondingly higher risk. According to Nalin Shah, Managing Director at Nuvama, the most crucial factor for investors is rigorous due diligence on the credit quality of the underlying issuer. An investment's success hinges not just on the promised coupon rate but on the financial health and balance sheet strength of the company issuing the debt. Investors must assess the issuer's ability to service its obligations, as the risk of default is a significant consideration.

Collateral and Security in Focus

Beyond the issuer's creditworthiness, the quality of the underlying collateral is paramount. Many structured debt deals are backed by assets, such as shares or physical property. A thorough analysis of this security—and the legal certainty of enforcing it in a default scenario—is a non-negotiable step in the investment process. The strength of this collateral can provide a crucial safety net for investors in this high-stakes segment of the market. Consequently, a deep understanding of both the issuer and the security structure is essential before committing capital.