Bondholders of India's HDFC Credila Financial Services are worried that their holdings' valuation may be written down if the firm's ownership moves from its top-rated parent to a potentially lower-rated private equity firm, at least five institutional bondholders told Reuters.
AAA-rated Housing Development Finance Corp (HDFC) is set to sell 90% of Credila to Baring EQT, the Economic Times reported, to comply with a regulatory directive to cut its stake in the education finance firm to 10% within two years of closing its merger with HDFC Bank.
HDFC Credila currently has 43.25 billion rupees (nearly $523 million) worth of outstanding bonds, according to CRISIL. While CRISIL and ICRA rate the bonds AAA, they have placed the rating under watch with developing implications.
"The main concern for us is we will not be able to hold these bonds in our portfolios if the rating falls. In any case, we would expect the company to pre-pay these bonds," said a senior official at a large life insurance company.
The official and other sources declined to be named as their company policy does not permit them to talk to the media.
Bondholders have precedence for their anxiety since lower-rated Bandhan Bank Ltd's 2019 takeover of HDFC's Affordable housing finance unit, Gruh Finance, resulted in a rating downgrade.
Demand for HDFC Credila's bonds has slumped in the secondary market, with some traders pricing in a single or multiple-notch rating downgrade, said a bondholder.
While investors have not formally approached HDFC, some of them have held back-channel conversations, sources said.
HDFC is cognizant of bondholders' concerns and aims to have all stakeholders on the same page, a senior official at the housing financier said. HDFC and HDFC Credila did not officially respond to a Reuters request for comment.
Life Insurance Corp of India, ICICI Prudential Corporate Bond Fund, Aditya Birla Sun Life Mutual Fund, Larsen and Toubro Officers and Supervisory Staff Provident Fund, and Tata AIG General Insurance Co were the top five HDFC Credila bondholders as of Dec. 31, according to the company's latest information memorandum.
Some market participants said that even if the ratings are not downgraded after the ownership change, the yields will continue to rise as the premium it used to get on parent HDFC's backing will not be available.
HDFC Credila's creditors and bondholders will need to approve any stake sale.