Informist, Friday, May 19, 2023
By Asmita Patil
MUMBAI – The heavy supply of bonds from Housing Development Finance Corp Ltd has adversely affected appetite for its short-term papers as investors, particularly mutual funds, walk a tightrope to lock in higher rates without breaching exposure limit.
HDFC has been on a borrowing spree ahead of its proposed merger with HDFC Bank. In the year ended March, the housing finance company raised a total of 784.14 bln rupees through 11 bonds, according to data from the National Securities Depository Ltd. Of this amount, 643.02 bln rupees were raised through seven bonds maturing in 10 years.
So far in the current financial year, HDFC has raised another 210.05 bln rupees through issuance of three bonds.
On Wednesday, Informist reported that HDFC plans to raise at least 35 bln rupees through 10-year bonds next week.
The mortgage lender is facing a challenge in garnering demand in the three- and five-year segments of corporate bonds, where mutual funds mostly invest, primarily because of exposure limits and the likely classification of its debt after the merger with HDFC Bank.
According to Securities and Exchange Board of India regulations, mutual fund schemes cannot invest more than 10% of their net assets in debt and money market securities rated "AAA" issued by a single company. The investment limits can be extended by a further 2% with the approval of the board of the asset management company.
SEBI has also specified that exposure of a debt scheme of a mutual fund to a particular sector, barring investments in certificates of deposit, collateralised borrowing-and-lending obligation, government securities, Treasury bills, short-term deposits of scheduled commercial banks, and "AAA"-rated securities issued by public financial institutions and public-sector banks, should not exceed 20% of the scheme's net assets.
Exposure to the financial services sector can be extended by a further 10% of the net assets of the scheme by increasing investment in housing finance companies. This is where the classification of the debt comes into play.
Marzban Irani, chief investment officer for debt at LIC Mutual Fund, explained that after the merger HDFC bonds are likely to move from the category of housing finance company to non-banking finance company for mutual funds. For the insurance industry, HDFC bonds are currently classified as infrastructure and there is no clarity on what the classification will be after the merger. So, until the relevant sectoral regulators clarify the debt's classification or whether there will be a grandfather clause, even insurance firms may go slow on investing in the bonds and "demand will be skewed", he said.
Uncertainty over the categorisation of HDFC debt under regulatory norms has already led market participants to SEBI's door for clarification. According to sources, HDFC has also approached the regulators but has not got any response so far. "Till the effective date of merger, I don't see any (clarification) coming up," a source aware of the matter said.
An analysis of HDFC's recent bond offerings shows that issuances in the 10-year segment are getting swiftly absorbed owing to wider market participation and enticing rates, but not so much in the shorter-term segments.
At the beginning of the current financial year, HDFC raised only 30.05 bln rupees through bonds maturing in slightly less than two years when it was aiming for 70 bln rupees. On Monday, the lender raised 30 bln rupees through five-year bonds as against its plan to raise 80 bln rupees.
In contrast, the housing financier raised 150 bln rupees through bonds maturing in 10 years at a coupon of 7.80% in May.
Market participants believe HDFC's issuances will sail through if it taps the market in the long-term segment, as investor appetite remains intact for long-term papers.
"When interest rates are likely to trend lower, long-term investors are preferring to invest in 10-year bonds over three- or five-year bonds," said Deepak Agrawal, chief investment officer at Kotak Mahindra Mutual Fund.
So next week, HDFC plans to raise funds through bonds maturing in 10 years that carry a put option at the end of three years from the date of allotment.
In late March, the lender's board had approved borrowing up to 570 bln rupees through bonds. Seeing recent developments, the company plans to raise at most 100 bln rupees more from the corporate bond market by the end of June, the source quoted earlier said. End
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