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

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 banks 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 HDFCs 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 Funds Sharma said.

($1 = 82.0300 Indian rupees)

Reporting by Dharamraj Dhutia and Bhakti Tambe