Eros International – the paradox of a low risk, high yield bond

It is a sign of the times, and the remarkably benign conditions prevailing in the London securities market, that no less than 103 of the 106 corporate bonds quoted on the LSE’s Order Book for Retail Bonds (ORB) are trading above their par value.

This isn’t entirely good news for a bond investor. First and foremost, it means that any investor buying one of those one hundred and three bonds at their current prices is locked into a capital loss if they are held to maturity. This capital loss would be compensated by interest earned during the lifetime of the bond, and a bond could be sold before maturity at a profit in the event that prices rise further. However, as prices increase, so do the downside risks. In general, it is safer to buy bonds trading below par value than those trading at a premium.

Of the three bonds trading below par, two – EnQuest and Premier Oil – have been hit by the downturn in global oil prices. The third is Eros International, which describes itself as “a leading global company in the Indian film entertainment industry.”

This short description flags up two immediate risk factors.

Firstly, Eros’s dependence on the Indian market could be regarded as higher risk than a film company operating in the UK, given the apparently erratic interpretation that the Indian authorities have of their own tax laws.

Secondly, film production itself is widely regarded as a risky venture.

However, the Law of Large Numbers gives some reason for confidence. If Eros knows what appeals to the Indian public, while individual movies they back may fail, their overall film portfolio should make money. The fate of Eros does not depend on a few blockbusters. The company has spread its risk over 2,000 films and has produced 220 new films over the last three fiscal years. The company comments that, “New film distribution across theatrical, television and digital channels, along with library monetization, provide us with diversified revenue streams.”

The typical Bollywood storyline dates back to Cinderella and before – Boy Meets Girl, Boy Loses Girl, Boy Finds Girl Again – with the narrative played out against a backdrop of music, dance, laughter and a few tears until the two finally come together and live happily ever after.

Eros’s published accounts suggest that the old formula is working as well as ever. The company’s annual revenues have grown steadily, from $66 million in 2007 to $235 million in 2014. It has been consistently profitable – operating profits in 2014 were six times financing costs, and Eros’s profit after tax, at $37 million, represented a healthy 16% of turnover. Most encouragingly of all for a bond investor, the company had cash reserves of $145 million at March 31st 2014, equating to well over half of its annual turnover.

The storylines may be pure hokum, but there are worse ways of making a living than through the Bollywood dream machine, employed in the great enterprise of cheering us all up.

Overall, Eros looks like the Holy Grail of bond investment – a comparatively low risk, high yield investment. So Eros bonds become the fourth investment of the Experimental High Yield Bond Portfolio.

Issuer: Eros International
Coupon: 6.5%
Payment Dates: April 15th and October 15th
Maturity date: October 15th 2021
Offer Price: 97.4
Running yield [RY] at Offer Price: 6.67%
Yield to maturity [YTM] at Offer Price: 7.01%
Nominal Amount: £1,000
Cost: £984.12 (inclusive of £10.12 accrued interest) + £5.75 commission = £989.87

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