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Will investors regain confidence on home financiers?

RBI has slashed the rate by 135 bps since February, helping lower the absolute yields.

, ET Bureau|
Updated: Oct 15, 2019, 08.01 AM IST
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At present, three-year, top-rated HFC bonds are yielding 7.79%, compared with 9.43% in September last year, and 8.15% in March 2018.
The difference in the cost of debt funds for triple-A rated private-sector home financiers, such as Housing Development Finance Corp (HDFC), and Tata Capital Housing, and that for other public-sector bond issuers, such as Power Finance Corp, has lately narrowed, signalling renewed investor appetite for bonds issued by top non-bank lenders.

For such financiers, absolute yields have also begun easing from the highs reached in the immediate aftermath of last autumn’s IL&FS defaults, which had choked fund flows to private-sector home financiers and non-bank lenders.

"The crisis of capital appears to be nearing its end," said Ajay Manglunia, MD and Head - institutional fixed income - JM Financials. "Some investors are beginning to trust housing finance companies again.”

The spread, or differential, between the bonds of triple-A rated housing finance companies (HFC) and similar public sector benchmarks is now 82 basis points, compared with 103 basis points (average) quarter-ended in March and 94 basis points in June, showed data from Crisil Research.

A basis point is one hundredth of a percentage point.

About a year ago, infrastructure financier IL&FS defaulted on loan repayments, stoking concern among bond investors in non-bank lenders.

At present, three-year, top-rated HFC bonds are yielding 7.79%, compared with 9.43% in September last year, and 8.15% in March 2018. Absolute yields remained above 8% for at least six quarter until last month, Crisil data showed.

The Reserve Bank of India (RBI) has slashed the policy rate by 135 bps since February, helping lower the absolute yields.

“Companies backed by large brands are drawing investor attention as the housing market in India has a long way to go, with the government making housing a priority," Manglunia said.

The government has set the “Housing For All” goal by 2022.

For lower rated papers, the spreads remain elevated, however. For AA+ rated HFC bonds, the spread is 389 bps in October this yearversus 88 basis points in September last year.

“Select investors are seeking to bet on companies with good corporate governance as money is amply available in the system," said Dinesh Prajapati, head of treasury at M&M Finance. "Our bond borrowing costs are falling almost to the September level last year.”

"Mutual funds are still to be back to the bond market, while corporate treasuries and insurers are subscribing to bonds offered by top NBFCs, including housing finance companies," Prajapati said.

For NBFCs, the spread is still relatively high, compared with last September. For such lenders, the gauge is now at 128 bps compared with 75 bps in September 2018 for three-year bonds.

“The contracting spreads reflects investors’ comfort level for top rated HFCs,” said Bhushan Kedar – Director, CRISIL Funds and Fixed Income Research. “On the other hand, less demand for lower-rated papers also aided to shrinking spreads.”
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