Biggest merger to impact Indian debt market as large seller exits

A huge merger in India of Housing Development Finance Corp. and divisions of HDFC Bank Ltd. possibly remove one of its main issuers from the rupee bond market, which could affect debt sales and bank fees.

The integration of the two companies will create a big player worth more than $200 billion in financial services, and the parent company will be able to use the bank’s deposits for growth rather than increasing debt. The merger is not as negative for India’s bonds, as the hole created by the shady lender could allow new borrowers to sell the notes, helping India deepen its debt market.

The shadow lender is India’s largest bond seller in 2022 and issuing accounts for 7.7% of the country’s total issuance this year, up from an average of around 6% over the past 10 years. The company is likely to become a bank and offer promissory notes when necessary to increase the capital reserve and finance infrastructure projects.

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The disappearance of HDFC will negatively impact overall sales next year. It is expected that many new issuers and public and private companies will enter the bond market next year, when yields stabilize, which may gradually fill the gap.

The merger, which is due to close in the second quarter of 2023, will give HDFC access to Rs 16.7 trillion ($202 billion) of funds, consisting of low-cost current and savings deposits and term deposits of the bank, enabling it to continue building assets that the end of September were 6.9 trillion rupees.

An exit by an issuer of this size could hurt the commission income of the bankers who orchestrated the various HDFC offerings. According to data for the past few years, Axis Bank Ltd. and ICICI Bank Ltd. controlled most of these sales.

At the same time, HDFC’s withdrawal from the bond market will benefit its competitors as they gain access to a wider credit pool, which will lower the cost of financing other top-rated home finance companies.