HDFC intends to issue Rs. 15000 crore in Bonds
Housing Development Finance Corporation (HDFC), the company that will soon be merged into HDFC Bank, is likely to raise Rs15,000 crore in 10-year bonds in the coming week. Typically, finance companies need to keep a continuous flow of capital to fund their asset book creation. The current bond issue is expected to have a base size of Rs11,000 crore with a green shoe option to retain an additional subscription of Rs4,000 crore. Typically, a Green Shoe option is the facility to retail a part of the oversubscription up to a certain pre-defined limit. These bonds will have a maturity of 10 years and the merchant bankers for the issue have already been finalized and the mandate has been given to them for the same.
The coupon is quite attractive. The housing financier will be offering a coupon of 7.80% on this bond issue, for which it plans to invite bids from investors and bankers next week. That is nearly 70 bps over the rate on the 10 year benchmark yield. It may be recollected that bond yields have gone up sharply in the last one year as the RBI hiked the repo rates by 250 basis points from 4.00% to 6.50%. This has led to an increase in the cost of funds for most of the borrowers. However, finance companies like HDFC and other banks have seen the yields on loans grow much faster than the rate on borrowing and that has led to most of them seeing broader net interest margins or NIMs.
HDFC is yet to make an official announcement or pronouncement on the proposed bond sale on electronic bidding platforms. However, market reports are quite strong that this issue should happen as early as the next week itself. The bonds are rated AAA by CRISIL and India Ratings. Typically, a rating of AAA means the bond has the highest level of safety with respect to payment of interest on time as well as the timely redemption of bonds when the principal becomes due. This yield paid by HDFC of 7.80% is at par with previous bond raisings done by HDFC.
It may be recollected that just in the previous week, HDFC had raised close to Rs3,005 crore, but this was of a much shorter tenure of 1 year and 10 months. At that time, the coupon had been fixed at 7.79%. This time around the 7.80% coupon is on a 10 year bond. While the coupon rate may still be the same, it must be said that adjusted for maturity, the current bond issue is much cheaper. However, we do currently live in an era of inverted yield curves where short tenure bonds command higher coupons and yields than longer tenure bonds. So, the maturity advantage cannot be taken at face value.
In fact, HDFC has already secured all approvals for the $40 billion merger with HDFC Bank which will be fully executed through a stock swap. The merger is likely to be completed by the middle of 2023 and once the merger is completed, the asset size of the combined entity would become substantial bigger with a banking license to boot. Of course, in terms of asset wise rankings, the combined entity will continue to remain the second largest bank in India after SBI.
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