HDFC's exit creates an opportunity for wholesale NBFCs in debt market

13 NBFCs raised Rs 12,551 crore in July so far

The merger of Housing Development Finance Corporation (HDFC) with HDFC Bank on July 1 has created an opportunity for non-banking financial companies (NBFCs), which focus on wholesale lending, to tap the corporate bond market.

HDFC was a major player in that segment and often left little for other players with its large borrowing requirement. Between July 1 and July 13, NBFCs raised around Rs 12,251 crore by issuing debt, according to capital markets data provider Prime Database. Most deals were executed in the second week of the month.

Market participants said the appetite of wholesale NBFCs would gradually improve, leading to an increase in their issuance size.

“The rates are not expected to come down any time soon, but the wholesale NBFCs which were not able to raise funds earlier might come to the market now,” said Venkatakrishnan Srinivasan, a bond market veteran and founder, Rockfort Fincap. “In terms of quantum, the appetite of higher-rated NBFCs might improve going forward and lower credit rated NBFCs will continue to look for opportunities”.

HDFC raised a substantial amount of funds through multiple bond issuances in the financial year ended March 31, 2023 (FY23) and in the current year, leaving limited opportunities for investors to invest in other non-bank lender securities. The merged entity will not require to tap corporate bond markets as banks have access to deposits.

The mortgage financier raised Rs 78, 414 crore through 11 bond issuances in 2022-23 and Rs 42,427 crore through six bonds this financial year ahead of the merger, according to data by National Securities Depository Ltd. In 2023, HDFC raised Rs 74,062 crore in the debt market, according to Prime Database.

“The bonds of HDFC will be traded as NBFC bonds — the reason why people may not have much appetite for NBFCs,” an analyst at a brokerage firm said on the condition of anonymity. “But when HDFC Ltd’s bonds mature gradually, then there will be an appetite for NBFCs.”

Historically, NBFCs have found it challenging to borrow significant amounts through bond issuances, making them more reliant on bank loans. Due to robust credit growth and the need to refinance previous debt, NBFCs may have to offer higher rates to raise funds.

Preference for higher rated bonds

As the cost of borrowing rises, the spread between AAA-rated NBFCs and AA+ rated NBFCs continues to widen, with investors showing a preference for higher-rated bonds. “The AAA-rated bonds are more liquid. They can be easily traded when there is a scenario like a rate cut,” a dealer at a state-owned bank said on the condition of anonymity. “ Whereas, the AA+ rated bonds are less liquid and are supposed to be held on to, which is why people will continue to go for AAA-rated bonds.”

While NBFCs have always been present in the market, this situation presents a favorable opportunity for wholesale NBFCs, as HDFC was a wholesale NBFC, he said. “In this month so far, approximately 7-8 NBFCs entered the market to raise funds,” the person added.

According to NSDL data, the difference in the yields on 10-year bonds issued by AAA-rated Aditya Birla Finance and AA+ rated Cholamandalam Investment and Finance expanded to 122 basis points in June. This represents a significant increase from the 87-90 basis points spread during the same time last year, suggesting a growing perception of higher risk associated with AA+ rated bonds.