November 30, 2018 / 9:44 AM / 15 days ago

HDFC bucks finance company slump

* Bonds: India’s top NBFCs sense opportunities as weaker companies grapple with liquidity squeeze

By Krishna Merchant and Prakash Chakravarti

MUMBAI/ HONG KONG, Nov 30 (IFR/LPC) - Housing Development Finance Corp is set to raise US$500m from its first US dollar bond, its CEO said, as it looks to expand its funding channels and press home its advantage as India’s biggest housing finance company.

HDFC is stepping up its use of offshore loans and bonds after a liquidity crunch in the shadow banking sector exposed the limits of the domestic market. Weaker finance companies have been forced to slow lending growth after defaults at Infrastructure Leasing & Financial Services curbed their access to funding, creating an opportunity for the country’s biggest non-banking financial companies to expand.

Keki Mistry, HDFC chief executive officer, said the company had access to a variety of funding sources, both domestic and international, such as Masala bonds, term loans, commercial paper, retail deposits, and funds from insurance companies.

“Though we do not focus on market share, it will certainly help AAA NBFCs like us gain market share as we have the flexibility of raising money from a variety of sources and switching between different sources depending on what is a cheaper source,” said Mistry in an interview.

“We have plans to raise US$400m–$500m from a syndicated dollar loan followed by our maiden dollar bond issue of US$500m in a couple of months,” Mistry said. “We have approval from the Reserve Bank of India to raise up to US$1.5bn from external commercial borrowings in the next six months.”

Market sources say the housing finance company is close to mandating three to four banks on the loan, which will have a tenor of five years and will be denominated in yen.

“We see no reason to believe that we will not continue to see the double-digit growth which we have seen in the past,” said Mistry. “We expect to be bigger and stronger in the next year.”

Weak NBFCs are struggling as their strategy of borrowing short and lending long was undone by the IL&FS crisis.

“The break happened after IL&FS defaulted. There was risk aversion which compounded for companies with high leverage,” said Mistry. “Liquidity is still tight in the market, but complete lack of willingness to lend money and risk aversion has reduced.”

HIGHER COSTS HDFC is well placed to weather the current liquidity tightness, but at a higher cost, said Elara Securities in a note dated November 14. Elara Capital estimates HDFC’s loan book will grow at 17% over FY18-20.

Since October, HDFC has been active in the domestic market as bond yields have eased from their post-IL&FS default highs. The yield on India’s 10-year AAA rated corporate bonds has fallen to 8.49%, down 68bp from a three-year high of 9.17% on October 5. However, over the past year, that yield is up by 70bp, according to Refinitiv data.

HDFC recently signed a US$750m five-year loan after attracting 11 banks in general syndication, offering a top-level all-in pricing of 115bp based on an interest margin of 100bp over Libor and an average life of 4.88 years.

Last Wednesday, HDFC raised Rs90bn from 10-year bonds at 9%, with a major chunk of the issue placed with the Employees’ Provident Fund Organisation, according to DCM bankers. On November 20, HDFC raised Rs5bn from five-year one-day Masala bonds at 8.75%, payable semi-annually.

LONG-TERM FUNDING Bigger NBFCs are also raising long-term funds to strengthen their asset-liability profiles in anticipation of action by the RBI. “NBFCs will try to reduce their short-term funding liabilities and raise long-term funds,” in anticipation of tighter asset/liability management rules by the central bank, said Lakshmi Iyer, chief investment officer of debt and head of products at Kotak Mutual Fund.

Mistry also expects the RBI to announce tighter rules for short-dated commercial paper issuance.

“The RBI will tighten the ALM process and restrict the amount of money NBFCs can borrow from CPs to maybe not more than 15%–20%.”

HDFC is also looking to join a clutch of state and private banks that have been buying assets from more stressed NBFCs looking to get through the liquidity crunch. The housing finance company will buy good quality housing loans, “provided they are available at the right price and meet our credit standards,” said Mistry.

The RBI on Thursday relaxed rules for NBFCs to sell or securitise their loan books, in a bid to ease persistent stress in the sector. (Reporting by Krishna Merchant and Prakash Chakravarti; Editing by David Holland and Vincent Baby)

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