HDFC Bank Bond Sale: HDFC Bank plans to raise ₹50, 000 crore through bond sale to back its big bang merger

In one of the biggest bond sales to date by an Indian lender, HDFC Bank will decide later this month on garnering about ₹50,000 crore to help meet higher reserve requirements ahead of its proposed merger with HDFC Ltd.

The estimated requirement was more than ₹80,000 crore and the bank, India’s most valued, already has some excess bonds in its portfolio, dealers said.

In an exchange filing, the bank said Wednesday that it would deliberate on the fundraising proposal at its upcoming board meeting on April 16.

“We wish to inform you that the bank proposes to raise funds by issuing perpetual debt instruments, tier II capital bonds and long-term bonds for financing of infrastructure and affordable housing up to a total amount of ₹50,000 crore over the period of next twelve months through the private placement mode,” HDFC Bank said in its filing.

Raised $1B in Aug Last Year

The perpetual bonds, if up for sale now, may offer returns in the range of 7.70-7.85%, said dealers, citing existing secondary market yields of State Bank of India (SBI) instruments.

Last fiscal, the government lender sold perpetual bonds, or quasi-equity securities known as Additional Tier 1 in market parlance. These bonds have no fixed maturity.

With benchmark bond yields surging lately, those SBI papers now yield up to 25 basis points higher – about 7.65-7.80%.

One basis point is 0.01%.

In August last year, HDFC Bank tapped overseas investors, raising $1 billion in a perpetual bond sale – the largest offshore AT1 issuance by any onshore bank. Those bonds offered 3.7%, 43 basis points less than their initial guidance.

“HDFC Bank bonds are very likely to find interest from top institutional investors such as insurance, mutual funds, corporates, and EPFO and the LIC,” said Ajay Manglunia, managing director and head of debt capital market, JM Financial. “However, the bank may have to pay a tad higher by way of rates going forward, with the changing interest rate dynamics and rising yields.”

HDFC Bank had raised perpetual bonds locally in May, 2017. Those bonds, carrying a coupon of 8.85%, will now come up for call options, offering an exit route for investors.

“It is likely that the bank will float the perpetual issue soon,” said an investor who had subscribed to the earlier set of bonds. The bank’s infrastructure bonds might cost 7.05-7.20% now, although the bond market seeks new direction from the RBI‘s monetary policy this Friday.

ICICI Bank sold infrastructure bonds worth ₹8,000 on March 9 offering 7.12% with 10-year maturity.

In the run-up to the proposed HDFC Bank-HDFC merger, which may take up to two years to fructify, the merged entity may need to buy bonds worth ₹80,000-90,000 crore over the next 18 months to gain regulatory approvals.

Banks must maintain SLR, or a statutory liquidity ratio, which is the proportion of deposits a lender must hold in government bonds. That threshold is currently at 18% of net demand and time liabilities (NDTL). CRR, or cash reserve ratio, is the percentage of deposits banks have to keep with the Reserve Bank of India (RBI), and that threshold is 4%.

The proposed merger has raised CRR and SLR requirements as the balance sheet size of the merged entity will be much bigger than what the standalone bank now has.

“We have ₹80,000 crore of excess liquidity cushion,” HDFC Bank’s Managing Director Sashidhar Jagdishan said on Monday, when the merger was announced. “We also plan to ramp up our deposit collection drive, in the run-up to the merger; so, I am not worried about these requirements.”

Despite the drive to meet liquidity norms for the merged entity, the managements have sought two-three years to meet SLR and CRR norms for all new loans.

“The bank has requested a phased-in approach in respect of SLR and CRR, priority sector lending as well as grandfathering of certain assets and liabilities and in respect of some of its subsidiaries,” Deepak Parekh, chairman, HDFC, had said on Monday.