Analysis: HDFC Bank-HDFC merger set to shake up debt funding for non-bank borrowers

Housing Development Finance

23/06/2023 09:04

By Dharamraj Dhutia and Bhakti Tambe
       MUMBAI, June 23 (Reuters) - 
    The merger of Housing Development Finance Corp  HDFC.NS  and
HDFC Bank  HDBK.NS  is set to shake up the debt fundraising
market for non-bank financiers in India as the exit of a large
borrower will leave investors searching for other options, at
least six mutual fund managers said.
  
        The void left by HDFC could benefit other housing
finance companies, which will now be able to borrow funds at a
lower cost as supply diminishes even though demand for such debt
remains steady, they told Reuters.
  
    A $40-billion merger between the two entities is set to
conclude next month, following which HDFC will stop issuing debt
and rely on the merged bank's deposits to continue lending.
    Debt issued by housing finance companies "should start
commanding a premium again over the next few weeks, as HDFC was
the largest supplier in the space," said Raju Sharma, head of
fixed income at IDBI Mutual Fund.
    Under the rules of the Securities and Exchange Board of
India (SEBI), mutual funds can invest 30% of their assets under
management in debt securities issued by non-banking financial
companies (NBFC) and housing finance companies (HFC), with a 20%
ceiling on papers of NBFCs.
    Yields on debt issued by HFCs could fall by about 10 basis
points in the coming weeks, said Ajay Manglunia, managing
director and head of investment grade group at JM Financial.
    Interest rates on AAA-rated HFC bonds are currently in the
range of 7.65-7.80% for three-year to five-year tenors.
       

    Outstanding bonds of HDFC are estimated to be 2.64 trillion
rupees ($32.18 billion), according to Crisil and Reuters data.
    In the fiscal year 2022 through 2023, HDFC raised 784.15
billion from the debt market, higher than the 500 billion rupees
a year before. It has raised 460.62 billion rupees since April
this year.
    Mutual funds hold around 270 billion rupees of HDFC's bonds
as of May 31, data from information service provider Prime
Database showed.
    After the merger, this debt will be classified as exposure
to the banking sector, while fresh supply of debt will stop.
    Rival LIC Housing Finance may be the biggest beneficiary of
HDFC exiting the market, fund managers said. Other competitors
such as ICICI Home Finance, Bajaj Housing Finance, Tata Capital
Housing Finance and Shriram Housing Finance could also see an
increase in demand for their debt issuances, they said.
    "With the merger of HDFC with the bank, demand for HFC
papers will increase, as the list of quality issuers and their
issuance will be lower than the demand," said Laukik Bagwe, fund
manager at DSP Mutual Fund.
    "The credit spreads in the HFC space will remain tight,"
Bagwe added.
    Earlier this week, ICICI Home Finance sold nearly five-year
bonds at a yield of 7.75%, while five-year benchmark government
bond yield was around 7% on a semi-annualised basis.
    The spread between government bond yields and HFC papers may
ease to below 50 bps from the current level of over 60 bps due
to the rising demand for such papers, IDBI Mutual Fund's Sharma
said. 

($1 = 82.0300 Indian rupees)

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Funds raised by HDFC via sale of bonds    https://tmsnrt.rs/43PVetC
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Dharamraj Dhutia and Bhakti Tambe
Editing by Dhanya Ann Thoppil and Saumyadeb Chakrbarty)
 ((Dharamraj.dhutia@tr.com))