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HDFC and LIC in Discussions to Raise INR 10,000

19 December 20224 mins read by Angel One
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A Brief Overview

Unless you have been living under a rock, you must be familiar with the Life Insurance Corporation of India’s initial public offering (or IPO). This IPO is set to be the largest the country has ever witnessed. It will see the government selling stock to the public on behalf of the insurance behemoth for the first time. The importance of this IPO cannot be understated as funds drawn from it will be used by the government to enhance infrastructure and improve the state of the Indian economy. Now, however, with the Ukraine-Russia war underway and insurance employees standing in opposition to the IPO, the LIC IPO may be postponed. Set against this backdrop, understand the intricacies pertaining to LIC and how it has been in discussions with HDFC in order to raise INR 10,000 crore.

LIC Speaks with HDFC Regarding Fund Raising

Housing Development Finance Corp (or HDFC) serves as the country’s largest mortgage lender. It has begun discussions with the LIC Of India in order to raise funds for it. With an amount of INR 10,000 crores as the figure sought to be raised, HDFC has proposed a local bond sale to transpire this week as a means of raising funds. This fundraising effort is indicative of credit demand for new homes potentially being revived.

These 10-year bonds could potentially offer a 7.25 to 7.35 per cent rate of interest and are likely to be available to bid on come March 8th, on an exchange platform. This bond sale will be arranged by ICICI Bank.

As per internal sources, the Life Insurance Company of India has been given internal approval to carry out this proposed investment. HDFC, which serves as a large-scale home financier, seeks to raise these funds prior to yields beginning to surge upwards. The benchmark bond yield moved upwards by 16 points over the course of the past two weeks resulting in funding costs rising on an overall basis.

In the past, HDFC has been able to raise similar 10-year bonds that offered an interest of 7.05 per cent. This last occurred on December 1, 2021, wherein the benchmark yield amounted to 6.35 per cent. At the time, the differential lay at 70 base points. The gap that persists is anticipated to narrow in a major way such that it falls in the 45 to 55 range of basis points. Such a scenario is likely to work in the favour of and benefit the borrowers.

One basis point is equivalent to 0.01 per cent. Now, since the demand for loans has begun to rise considerably, HDFC will need to arrange resources such that they can tackle loans with efficiency. Debt papers currently on offer have a base size that amounts to INR 500 crore. They also have the option to hold onto subscriptions up to INR 10,000 crores. It is worth noting here that paperwork that’s been processed by ICRA, as well as Crisil, has been returned with AAA ratings.

Ultimately, the final coupon will be summed up via bidding. The bid will result in the insurer potentially ending up owning greater than three quarters of the issue size. Only a small portion will remain for other bidders to attempt to secure. These additional bidders include insurers and retirement bodies.

Factors Worth Noting

It is possible for some provident funds that are standalones as well as the Employees’ Provident Fund Organisation to bid on owning such highly rated papers. That being said, the allocation will be rounded up keeping in mind bids received via the platform that allows for electronic bidding to take place.

Worth noting here is the fact that the EPFO began to halt its investments in corporate bonds once a few of their investments in highly-rated debt papers went awry. In recent times this fund has begun to seek deployment avenues within corporate papers as dated government bond supplies remain absent. Funds that are focused on securing significant yields could significantly benefit from AAA-ratings.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

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